Kenneth R. Szulczyk

Answers to Chapter 17 Questions.........................................................

1. Best forecast for a random walk is the previous period's value, 3 rm per U.S. dollar.


2. First, countries erected trade restrictions and barriers that prevent the free flow of goods
   entering or leaving a country. Second, PPP does not include transportation and transaction
   costs. Third, some services are not internationally traded, such as haircuts and real estate.
   Finally, countries define their basket of goods differently.


3. Buy the Big Macs from Russia for $2.29 and ship them to Venezuela for $7.92.


4. The Japanese yen is undervalued approximately 5.5% relative to the U.S. dollar.

100 =-0.055

$ 3

$4.09 $ 3

100 =

P

P P

P =

U.S.

Jaoan U.S.

BigMac 4. 3

 4. 3



 

5. The PPP only includes the absolute price levels, while the relative PPP allows different price
   levels between countries because the inflation rates cause the exchange rate to change
   predictably.


6. Using the approximation, the U.S. dollar appreciates approximately 4% per year relative to
   the Russian ruble (or 7% - 3%). Using the exact formula, the U.S. dollar appreciates 3.9%
   relative to the ruble.

0. 039

0. 03

0. 07

   1 

1 +

1 +

1

1 + π

1 + π

e=

d

f

7. We calculated the U.S. competitive ratio below:

     

0. 971

1. 03 1. 02

1. 02

1



 









1 + π e

1 + π

k

d

f

8. We assume the change in the velocity of money is zero because the problem did not refer to
   them. If the ringgit is defined at the home currency, the ringgit should appreciate
   approximately 1% per year, calculated below:

s=mUSS mMalayS vUSvMalayyMalayyUS 0. 02  0. 05  0. 07  0. 03  0. 01

9. Home currency should depreciate approximately 2.5%, calculated below:

    0.025

360

180

0.05 0.10

360

T

ef,T ifid   ^

10. Appreciating currency boosts your investment. Thus, we computed the return below: