Question

Please answer in an 'A,B,C,D' format where A would be the first answer and D would be the last. Thank you.

QUESTION 22 Suppose that $1 U.S. costs $1.50 Canadian. If in St. Louis a CD costs $10 U.S. and in Montreal it costs $15 Canadian, then _____ Canadians will buy CDs in St. Louis Virgin Records will have an incentive to build more stores in North America Americans will buy CDs in Montreal o purchasing power parity exists QUESTION 23 Suppose that the nominal exchange rate between the U.S. dollar and Japanese yen is currently $1 U.S. = 2 Japanese yen. Suppose that a Big Mac burger sells for $2 in U.S. and 8 yen in Japan and transportation costs are zero. The PPP theory suggests that the U.S. dollar should depreciate. the Japanese yen should appreciate. the nominal exchange rate should be $1=4Y. All of the above are correct. QUESTION 24 Suppose the Fed wants to fix the U.S. dollar/Mexican peso rate at 11 pesos per dollar under a fixed exchange rate policy. If the exchange rate falls to 10 pesos per dollar, the Fed can sell dollars. attempt to freeze all sales of dollars. any of the above actions could take place. buy dollars. QUESTION 25 The U.S. dollar will appreciate in value relative to other currencies if, holding everything else constant, o the Fed increases the money supply. the U.S. government reduces import tariffs. the U.S. government borrows less money. the U.S. government borrows more money.

Answer 1

Answer 22

$1 US=$1.5 Canadian

And CD cost is $10 US and $15 canadian hence the ratio is $1 US =$15/10=$1.5 canadian.

Hence Purchasing parity exists. Hence option D is correct

Answer 23

Normal exchange rate is $1 US= 2 yen

Exchange rate as per purchasing power of Big Mac is $ 2US =8 yen. Or $ 1 US=8/2=4 yen

Hence yen should depreciate and US dollar should appreciate as per PPP theory.

Hence option C IS CORRECT

ANSWER 24

Target rate is $1 US= 11 peso bit actual rate is $1 US=10 peso. Hence the demand for dollars will increase, fed should reduce supply to increase the rate to 11 peso. Hence Fed should buy dollars.

Hence option D is correct

Answer 25

When US government will borrow more money the supply of dollars will reduce and hence the currency will appreciate.

Hence option D is correct.