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difference between the real exchange rate and the nominal exchange rate

1. Explain the difference between the real exchange rate and the nominal exchange rate.

2a. If a Japanese car costs 500,000 yen, if a similar Canadian-produced car costs $10,000, and if a dollar can buy 100 yen, what are the nominal and real exchange rates?

2b. Explain the relationship among saving, investment, and net foreign investment.

3. Explain two reasons why purchasing power parity does not hold for all goods and services.

4. What is happening to Canada's real exchange rate in each of the following situations? Explain.

a. The Canadian nominal exchange rate is unchanged, but prices rise faster in Canada then abroad.

b. The Canadian nominal exchange rate is unchanged, but prices rise faster abroad then in Canada.

c. The Canadian nominal exchange rate declines, and prices are unchanged in Canada and abroad.

d. The Canadian nominal exchange rate declines, and prices rise faster abroad then in Canada.

5. "Even though Canada is a small, open economy, trading mostly with the United States, it can still have its own independent monetary policy." True or False. Explain.

6. If Canada's saving is held constant, predict the impact of an increase in net foreign investment on Canada's accumulation of domestic capital.

7. If coke sells for $1.20 Canadian and for .75 pounds in the U.K, determine what the exchange rate should be if purchasing power parity holds.

8. The economits, and international news magazine, regularly collects data on the price of McDonald's Big Mac hamburger in different countries in order to examine the theory of purchasing power parity.
a. Why might the Big Mac be a good product to use for this purpose?
b. Based on the Big Mac data, purchasing power parity appears to hold roughly across some countries, though not across others. Why might the assumptions underlying the theory of purchasing power parity not hold exactly for Big Macs?

Solution Summary

The difference between the real exchange rate and the nominal exchange rate is provided.

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