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Chаpter 10 Fоrmulаs аnd Definitiоns All symbоls are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ********************************************* Information for questions 13-15 The figure represents possible supply and demand curves for the Brazilian Real (symbol R). The vertical axis is in the usual unit of U.S. dollars per Real. Note that one vertical grid spacing is 1 cent. Initially the Real is trading with supply curve S0 and demand curve D0, therefore the initial exchange rate is 0.13 $ / R. For numeric questions, only the exact answer is accepted, so double check that you are reading the graph correctly. All graphical answers can be made exact with the assumption: if two curves seem to cross where two grid lines also cross, then they do. Consider again the situation of the previous question: in the long-run Americans buy fewer Brazilian goods, which they perceive to be expensive, and this shifts either the supply or the demand, in the manner that you answered in the previous question. Suppose that this shift causes the supply or the demand curve to become one of the curves shown in the figure. Therefore, either the demand remains the same at D0, with the supply shifting either to S1 or to S2; OR the supply remains the same at S0, with the demand shifting either to D1 or to D2. You figured that in the previous question. Here, enter the new exchange rate, in $/R units. (For example, if it hadn’t changed, you’d enter 0.13). Only exact answer is accepted, so double check that you are reading the graph correctly.
Chаpter 10 Fоrmulаs аnd Definitiоns All symbоls are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ********************************************* Information for questions 13-15 The figure represents possible supply and demand curves for the Brazilian Real (symbol R). The vertical axis is in the usual unit of U.S. dollars per Real. Note that one vertical grid spacing is 1 cent. Initially the Real is trading with supply curve S0 and demand curve D0, therefore the initial exchange rate is 0.13 $ / R. For numeric questions, only the exact answer is accepted, so double check that you are reading the graph correctly. All graphical answers can be made exact with the assumption: if two curves seem to cross where two grid lines also cross, then they do. In the initial situation (with supply S0 and demand D0), when a U.S. tourist travels to Brazil, she finds that most consumption goods in Brazil are more expensive than in the U.S. Generally speaking, Americans perceive Brazilian goods to be expensive, and start purchasing fewer goods from Brazil. Complete the sentence: if the long-run forces that tend to bring countries into Purchasing Power Parity are operative, the _______ curve of the Real shifts to the _______.