People Window Holp Women\'s To × www.tecebo. × 74610181000414910263 -7 clng.ceng

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People Window Holp Women's To × www.tecebo. × 74610181000414910263 -7 clng.cengage MINDTAP Problems & Applications (Ch 18) Keep the Highest: /4 9. Problems and Applications q9 Purchasing-power parity hoids between the netions of Ectenia and wiknem, where the only commodity is Spam In 2015, a can of Spam cost 2 dollars in Ectenia and 16 pesos in Wiknam. The exchange rate between Ectenian dolers and Wiknamian pesos Over the next 14 years, inflation is expected to be 5 percent per year in Ectenia and 10 percent per year in pesos per dolar ikenam. If this infation comes to pass, what will happen over this period to the price of Spam and the exchange rate? Over this penod, the price of Spam in totena wil n wanam wt (Mint: Recall the rule of 20 from Chapter 27.) The exchange rate between wa sket, have a higher nonnal r Afr end of yours suggests a gelmeick sehen sominal interest rae, and profle from the intenest-rate differentiel OBO n the natios with the lower nominel inderest rete, invest in the nation with the higher with Which of the folewing stetements explains the faw in your triend's logc? O The scheme wouid work only if the reat interest rates are the ene seme 0 Nominal exchange rates adjust for the eftects of infunion The scheme wouid work only if there is greater infation in one metion than in the ather esc Fr 2 4

Explanation / Answer

Answer:- The exchange rate is given as

2 dollars = 16 pesos

1 dollar = 8 pesos

So the exchange rate is 8 pesos per dollar.

Answer:- Price of spam in Ectenia = 2*(1+0.05)14=3.96

So the price of spam will be almost double in Ectenia.

In case of Wiknam, the price will be=16*(1+0.1)14=60.75

So the price in this country is likely to be increased by four times.

Exchange rate:- 3.96Dollar = 60.75 Pesos

1 dollar = 15.34 pesos

Answer:- During this period, the price of spam in Ecteria will DOUBLE and , the price of spam in Wiknam will quadruple . And the exchange rate will be 15.34 pesos per dollar.

Answer:- Wiknam will have higher nominal inflation rate.

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