This questions involves analysis of the foreign currency market in which Argenti

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This questions involves analysis of the foreign currency market in which Argentine pesos and US dollars are exchanged for one another, similar to the models covered in class. According to a recent news source, Argentina's inflation in 2018 rising faster than expected. To answer these questions, assume no change in expected inflation or interest rates in the US. This means that you should assume that relative inflation in Argentina increases (and hold all else constant). Describe the impact on the market for the Argentine peso of the changes in relative inflation rates by answering the following questions. Parts A, B, and C are all connected as part of the same analysis A. Consider the market for the Argentine peso (ARS) and the demand and supply model used to depict the currency market in class and in the text. EXPLAIN whether, all else equal, the demand for the ARS increases, decreases, or remains unchanged. Explain the reason for your answer and clearly explain who are the demanders of Argentine peso in this model, and distinguish a change in demand from a movement along the demand curve. 1-3sentences. B. Consider the market for the Argentine peso (ARS) and the demand and supply model used to depict the currency market in class and in the text EXPLAIN whether all else equal, the supply of the ARS increases, decreases, or remains unchanged Explain the reason for your answer and clearly explain who are the suppliers of Argentine pesos in this model, and distinguish a change in supply from a movement along the supply curve. 1-3 sentences. C. Based on-your answers to (A) and (B) above, tell what happens to the value of the ARS against the dollar (appreclates.depreciates, unchanged, undetermined). EXPLAIN the results in terms of the model. 1-3 sentences

Explanation / Answer

A)

opportunity cost of one pound of rice on Alpha island is 60/10 i.e. 6 pounds of fish.

B)

opportunity cost of one pound of rice on Beta island is 15/25 i.e. 0.6 pound of fish

C) Beta has lower opportunity cost of producing rice hence it will have comparative advantage in producing rice.

D) any trade for rice at price between 0.6 to 6 pounds of fish is rational given Alpha specialise in rice as price of rice with respect to fish at which the goods are traded is 250/50= 5

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