Suppose that the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory

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Suppose that the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory

Suppose that the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory, what will happen to the dollar’s exchange value under each of the following circumstances?

The U.S. price level increases by 10 percent and the price level in Switzerland stays constant.

Suppose that the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory, what will happen to the dollar’s exchange value under each of the following circumstances?

The U.S. price level increases by 10 percent and the price level in Switzerland increases by 20 percent.

Suppose that the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory, what will happen to the dollar’s exchange value under each of the following circumstances?

The U.S. price level decreases by 10 percent and the price level in Switzerland increases by 5 percent.

Suppose that the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory, what will happen to the dollar’s exchange value under each of the following circumstances?

The U.S. price level decreases by 10 percent and the price level in Switzerland decreases by 15 percent.

Answer & Explanation (1)

Suppose that the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory, what will happen to the dollar's exchange value under each of the following circumstances?

The U.S. price level increases by 10 percent and the price level in Switzerland stays constant.

Here is a tip:

Purchasing Power Parity (PPP) says that exchange rates adjust to make goods and services cost the same everywhere.

Explanation

According to the purchasing power parity, when the price level in the U.S. increases by 10% the dollar should also depreciate by 10%. Therefore, the new exchange rate will be $0.55/franc.

Verified Answer

Dollar will depreciate and the new exchange rate will be $0.55 per franc.

The U.S. price level increases by 10 percent and the price level in Switzerland increases by 20 percent.

Here is a tip:

Purchasing Power Parity (PPP) says that exchange rates adjust to make goods and services cost the same everywhere.

Explanation

According to the purchasing power parity, the appreciation or depreciation of a currency depends on the relative inflation in the country. Since the increase in inflation in Switzerland exceeds the increase in inflation in the U.S. by 10% the dollar will also appreciate by 10%. New exchange rate will be $0.45 per franc.

Verified Answer

Dollar will appreciate and the new exchange rate will be $0.45 per franc.

The U.S. price level decreases by 10 percent and the price level in Switzerland increases by 5 percent.

Here is a tip:

Purchasing Power Parity (PPP) says that exchange rates adjust to make goods and services cost the same everywhere.

Explanation

According to the purchasing power parity, the appreciation or depreciation of a currency depends on the relative inflation in the country. Since inflation in Switzerland increases by 5% and inflation in the U.S. decreases by 10%. The difference between the inflation growth between the two countries is 15%. Therefore, the dollar will  appreciate by 15% as the inflation rate has gone down in the U.S. and the new exchange rate will be $0.425 per franc.

Verified Answer

Dollar will appreciate and the new exchange rate will be $0.425 per franc.

The U.S. price level decreases by 10 percent and the price level in Switzerland decreases by 15 percent.

Here is a tip:

Purchasing Power Parity (PPP) says that exchange rates adjust to make goods and services cost the same everywhere.

Explanation

According to the purchasing power parity, the appreciation or depreciation of a currency depends on the relative inflation in the country. Since the decrease in inflation in Switzerland exceeds the decrease in inflation in the U.S. by 5% the dollar will also depreciate by 5%. New exchange rate will be $0.525 per franc.

Verified Answer

Dollar will depreciate and the new exchange rate will be $0.525 per franc.

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