MU Economic Writing Worksheeet

Description

Instructions: Please read Chapter 11 Exchange Rates I: The Monetary Approach in the Long Run in your textbook (p. 376 – 381; 388 – 396; 402 – 406; 412). Type up your answers to the following questions:

What are the assumptions behind the law of one price?
What is the meaning of purchasing power parity?
A basket of goods costs £2,000 in the UK and the same basket costs ¥300,000 in Japan. If E¥/£ = 160, what is the real exchange rate of yen against pound? Does the PPP hold? Explain.
What is the difference between nominal exchange rate and real exchange rate?
What is the difference between absolute PPP and relative PPP?
What is the relationship between money supply growth, GDP growth and inflation based on the quantity theory of money?
If a country increases its money supply growth rate from 2% to 4% per year, all else constant, what will be the impact on its inflation rate and exchange rate according to the monetary approach?
What is the difference between the quantity theory of money and the general theory of money?
What is real interest parity?
How does a fixed exchange rate act as a nominal anchor to potentially help control a country’s rate of inflation?

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