Unformatted text preview: 6. In 1900, the exchange rate between the pound sterling (the British pound) and the US dollar was about $5 to the pound. In 2012, the exchange rate is about $1.60 to the pound. Using the PPP hypothesis, provide an explanation of why the value of the dollar has appreciated by about 200% over the past 110 years. 7. Define the concept of the real exchange rate between two currencies. Why would you expect the real exchange rate to always tend to equal about 1? 8. Suppose the nominal exchange rate between the US dollar and the Japanese yen is 90 Yen per dollar. If a diamond ring (a representative commodity) costs 100,000 yen in Tokyo and $1,000 in New York, is the real exchange rate between the two countries equal to 1, greater than 1 or less than 1 (where the home currency is the US dollar)? What would you expect to happen to the nominal exchange rate between the two currencies, and why (assuming that the prices of a diamond ring in New York and Tokyo do not change)?...
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- Spring '14
- Exchange Rate, Foreign exchange market, United States dollar, real exchange rate