Practice Questions 2.1 - 1 Practice Questions for Topic...

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1 Practice Questions for Topic 2.1 (Chapter 16) I. Suggested MyEconLab questions: Chapter 16 Section 16.1: Exercise 1.1, Exercise 1.2, Exercise 1.3 Section 16.2: Chapter Problem 1 Section 16.3: Exercise 3.1 Section 16.5: Exercise 5.2 Section 16.6: Chapter Problem 3 II. Other questions: NOTE: Answers to all of the following questions follow on pages 5-8. 1. The table below contains hypothetical figures in each of 3 years for 3 variables: 1) the exchange rate between the Canadian dollar and the U.S. dollar ( E C $/US$ ); 2) the US$ price of a basket of goods and services purchased in the U.S. ( P us ); 3) the C$ price of the same basket of goods if purchased in Canada ( P c ). Year E C $/US$ P us P c 1 1.200 100.0 150.0 2 1.188 103.0 153.0 3 1.307 103.0 168.3 i) Is the data in the above table consistent with the predictions of the theory of Absolute Purchasing Power Parity? Why, or why not? ii) Is the data in the above table consistent with the predictions of the theory of Relative Purchasing Power Parity? Why, or why not? iii) What are the values of the real exchange rate ( q C/US ) in these years? 2. Below are 3 years of hypothetical values for 3 variables: 1) the annual rate of interest on a euro deposit expressed in decimal form ( R ); 2) the actual annual rate of price inflation in Europe ( π E ); 3) the actual annual rate of price inflation in Canada ( π C ) Year R π E π C ( E e $/€ - E $/€ )/ E $/€ R $ 1 0.03 0.00 0.00 2 0.03 0.00 0.02 3 0.06 0.03 0.02 Assume the following: a) Relative purchasing power parity prevails and is expected to prevail. b) Inflation is everywhere fully anticipated. c) Interest rate parity prevails.
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