ECONOMICS Essay Example | Topics and Well Written Essays - 1000 words

ECONOMICS - Essay Example The price of coffee in Cote d’Ivoire will tend to be high locally while in Vietnam, the prices will be low as much will be imported. 2. (a) The law of one price will hold in the case of rice traded freely in U.S and Canada. For the law of one price to hold, the market should be free from any trade barrier. The relative price is less than one. (1/1.04=0.9615) (b) The law of one price will not hold in the case of sugar traded in Mexico and the U.S. This is due to the imposition of quota by the U.S government o imports. The relative price is less than one. (1/93.05=0.0107) (c) The law of one price will hold in the case of Big Mac sold in the U.S and Japan. This is due to the fact that the good is identical. The relative price is less than one. (1/12.93=0.0773) (d) The law of one price will not hold in the case of haircuts in U.S and the U.K due to the fact that there is no good being traded internationally. The relative price is greater than one. ... .12 Canada(C$) 1.04 1.09 -0.05 1.16 -0.02 Denmark(Krone) 5.17 8.26 -3.09 5.34 -0.17 Eurozone(euro) 0.69 0.93 -0.24 0.72 -0.03 Japan(Yen) 93.05 89.6 3.45 92.6 0.45 Mexico(peso) 12.92 9.24 3.68 13.8 -0.88 Sweden(Krone) 7.14 10.9 -3.76 7.90 -0.76 The change in exchange rates is not consisted with the PPP implied exchange rates. The failure of the Big Mac Index to correctly predict changes in the nominal exchange rate between July 2009 and Jan 2010 can be attributed to the fact that, the demand for the big Macs products is not uniform in all the countries. The price of the big Mac varies significantly from country to country due to the difference in commercial costs such as advertising and transportation costs. 7. (a) Korea Japan Rate of Inflation Rate of Inflation 12/6=2% 2/1=2% (b) The expected rate of depreciation will be, (2.5-2.0)/2.0=0.25% (c) New inflation rate in Korea 15/6=2.5% (d) The increase in money supply will lead to a decrease in the price level and an increase in the exc hange rate. (e) Suppose the bank of Korea want to maintain an exchange rate peg with the Japanese Yen, they will have to choose a money growth rate of 14% to keep the value of the won fixed relative to the Yen (f) In order for Korea to implement a policy that will ensure appreciation of the won against Japanese Yen, they need to set a growth rate between 12% and 16%. This is because the range will allow for a steady growth with low rate of inflation. 11. (a) Importance of having a nominal anchor. Nominal anchor such as exchange rate is that it provides a simple approach that can easily be understood by all members of the public. It also provides a quick means of curbing high inflation rate. A major drawback according to Obstfeld and Rogoff, (1996) is that it leads to loss in the independent