ch9 (2) - Example: Part 1 September 2002, $1.00 per...

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Example: Part 1 September 2002, $1.00 per € February 2006, $1.25 per € Compare $100 pair of leather boots made in U.S. with €100 pair of leather boots made in Italy. Suppose these prices are fixed in local currencies. In 2002 how do their prices compare in dollars? $100 for both In 2006? The Italian boots now cost $125, or 1.25 times as much as the American boots. The relative price of European goods to American goods increases when the dollar-euro exchange rate increases. Example: Part 2 September 2002, $1.00 per € February 2006, $1.25 per € How does this change affect the relative price of assets? You cannot directly deposit U.S. dollars into a foreign bank, so you convert the $1000 into euros. In September 2002, you receive €1000 to deposit into your German checking account. In February 2006, you still have €1000, but it will be worth $1,250 because each euro is now worth $1.25. Conversely, a German who had placed €1000 in a U.S.
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ch9 (2) - Example: Part 1 September 2002, $1.00 per...

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