Exchange Rate Fundamentals
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When US$1 can be converted to more than 12.35 Mexican Peso, does that mean the U.S. economy is stronger, more efficient and more productive than the foreign (e.g. Mexican) economy? On the other hand, when 1 Poundsterling can be converted to around US$1.60, does that mean the British economy is stronger than the U.S. economy? Why? Why not?
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Solution Summary
This solution provides an explanation about basic monetary policy and exchange rate along with several specific calculations of Purchasing Power Parity and exchange rates. The explanation is given in 236 words.
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Problem: When US$1 can be converted to more than 12.35 Mexican Peso, does that mean the U.S. economy is stronger, more efficient and more productive than the foreign (e.g. Mexican) economy? On the other hand, when 1 Poundsterling can be converted to around US$1.60, does that mean the British economy is stronger than the U.S. economy? Why? Why not?
Solution:
Currency exchange rates are based on how valuable a country's currency is, not necessarily how strong the underlying ...
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