EC102_01__-_Ch_12_Open_Economy_Macroecon (2)

EC102_01__-_Ch_12_Open_Economy_Macroecon (2) -...

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Chapter 12:  Open Economy Macroeconomics – Review Questions S11 Answers 1 1.  Real Exchange Rate =  (Nominal Exchange Rate) × (Domestic Price)/(Foreign Price) 2.  The real exchange rate  = (nominal exchange rate) × (Domestic Price)/ (Foreign price)  = 1.25 euros per dollar × 20 dollars per bottle of American wine/25 euros per bottle to  French wine = 1 bottle of French wine per bottle of American wine = 1 unit of foreign goods per unit of domestic goods 3.  The logic behind purchasing-power parity is the law of one price, which asserts that a good   must sell for the same price in all locations. If the price for a good is higher in one market   than in another, someone can make a profit by purchasing the good where it is relatively   cheap, and selling the good where it is relatively expensive. This process of arbitrage leads   to an equalization of prices for the good in all locations. 4.
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EC102_01__-_Ch_12_Open_Economy_Macroecon (2) -...

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