Question

1. What is the price line?

2. Suppose the U.S. dollar-Japanese yen exchange rate is 0.9349 dollar per yen, and the U.S. dollar-Swiss franc exchange rate is 1.6723 dollar per Swiss franc. What is the cross-exchange rate between the Swiss franc and the Japanese yen?

3. Suppose the U.S. dollar-euro exchange rate is 1.20 dollar per euro, and the U.S. dollar- Mexican peso rate is 0.10 dollar per peso. What is the euro-peso rate?

4. Suppose the dollar-yen exchange rate is 0.01 dollar per yen. Since the base year, inflation has been 2 percent in Japan and 10 percent in the United States. What is the real exchange rate? In real terms, has the dollar appreciated or depreciated against the yen? (Hint: Rr = Rn x (P*/P))

Answer 1

(1)

The price line (also called the budget line) shows the different combinations of two goods that the consumer can buy, given total available budget and prices of the two goods. Slope of this line is the ratio of price of the two goods. Since, income and prices remaining constant, to consume more of one good, the consumer has to buy less of the other good, the price line is negatively sloped.

(2)

SF-Yen cross rate = (US dollar-yen exchange rate) / (US dollar-SF exchange rate)

= (USD 0.9349 / yen) / (USD 1.6723 / SF)

= SF 1.7887 per yen

(3)

Euro-peso cross rate = (US dollar-peso exchange rate) / (US dollar-euro exchange rate)

= (USD 0.1 / peso) / (USD 1.2 / SF)

= SF 12 per peso

NOTE: As per Chegg Answering Policy, 1st 2 questions have been answered.