ECON 4351 Fall 2019 H3.pdf - ECON 4351 International Monetary Theory Policy Fall 2019 Dr Smith Homework 3 1 Definitions Provide succinct precise

ECON 4351 Fall 2019 H3.pdf - ECON 4351 International...

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ECON 4351 Fall 2019 International Monetary Theory & Policy Dr. Smith Homework 3 1. Definitions Provide succinct, precise explanations of the following concepts. a. Real exchange rate b. Covered interest parity c. Law of One Price d. Relative purchasing power parity 2. LOOP (This adapted from Question # 1 in Chapter 3 of the text; it appeared as Question # 4 on Homework 2.) Suppose that two countries, Vietnam and Côte d’Ivoire, produce coffee. The currency unit used in Vietnam is the dong (VND). Côte d’Ivoire is a member of Communauté Financiére Africaine (CFA), a currency union of West African countries that use the CFA franc (XOF). In Vietnam, coffee sells for 4500 dong (VND) per pound of coffee. The exchange rate is 40 VND per 1 CFA franc, E VND/XOF 40. a. If the law of one price holds, what is the price of coffee in Côte d’Ivoire, measured in CFA francs? b. Assume the price of coffee in Côte d’Ivoire is actually 160 CFA francs per pound of coffee. Compute the relative price of coffee in Côte d’Ivoire versus Vietnam. Where will coffee traders buy coffee? Where will

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