Ch 6.docx - 1 Law of One Price Define the law of one price...

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1. Law of One Price. Define the law of one price care-fully, noting its fundamental assumptions. Why are these assumptions so difficult to apply in the real world in order to apply the theory? 2. Purchasing Power Parity. Define the two forms of pur-chasing power parity, absolute and relative. 3. Big Mac Index. How close does the Big Mac Index conform to the theoretical requirements for a law of one price measurement of purchasing power parity? 4. Undervaluation and Purchasing Power Parity. Accord-ing to the theory of purchasing power parity, what should happen to a currency that is undervalued? 6. Real Effective Exchange Rate Index. What formula is used to converta nominal effective exchange rate index into a real effective exchange rate index? 7. Exchange Rate Pass-Through. What is exchange rate pass-through?8. Partial Exchange Rate Pass-Through. What is partial exchange rate pass-through, and how can it occur in efficient global markets? 9. Price Elasticity of Demand. How is the price elasticity of demand relevant to exchange rate pass-through?

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