Question

Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. a. In $2020,$ a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the exchange rate between Ectenian dollars and Wiknamian pesos? b. Over the next 20 years, inflation is expected to be 3.5 percent per year in Ectenia and 7 percent per year in Wiknam. If this inflation comes to pass, what will the price of Spam and the exchange rate be in $2040 ?$ (Hint: Recall the rule of 70 from Chapter 27 .) c. Which of these two nations will likely have a higher nominal interest rate? Why? d. A friend of yours suggests a get-rich-quick scheme: Borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Do you see any potential problems with this idea? Explain.

          Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam.
a. In $2020,$ a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the exchange rate between Ectenian dollars and Wiknamian pesos?
b. Over the next 20 years, inflation is expected to be 3.5 percent per year in Ectenia and 7 percent per year in Wiknam. If this inflation comes to pass, what will the price of Spam and the exchange rate be in $2040 ?$ (Hint: Recall the rule of 70 from Chapter 27 .)
c. Which of these two nations will likely have a higher nominal interest rate? Why?
d. A friend of yours suggests a get-rich-quick scheme: Borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Do you see any potential problems with this idea? Explain.

Show more…

Added by Elizabeth B.

Principles of Economics

Gregory Mankiw 8th Edition

Instant Answer

Solved by Expert Lottie Adams

11/13/2021

Step 1

The exchange rate between Ectenian dollars and Wiknamian pesos can be calculated by dividing the price of Spam in Wiknam by the price of Spam in Ectenia. So, the exchange rate is 24 pesos/4 dollars = 6 pesos/dollar. b. The price of Spam in 2040 can be calculated Show more…

Show all steps

lock

Thanks for your feedback!

Purchasing-power parity holds between the nations of Ectenia and Wiknam, where the only commodity is Spam. a. In $2020,$ a can of Spam costs 4 dollars in Ectenia and 24 pesos in Wiknam. What is the exchange rate between Ectenian dollars and Wiknamian pesos? b. Over the next 20 years, inflation is expected to be 3.5 percent per year in Ectenia and 7 percent per year in Wiknam. If this inflation comes to pass, what will the price of Spam and the exchange rate be in $2040 ?$ (Hint: Recall the rule of 70 from Chapter 27 .) c. Which of these two nations will likely have a higher nominal interest rate? Why? d. A friend of yours suggests a get-rich-quick scheme: Borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Do you see any potential problems with this idea? Explain.

Play audio

Feedback

Powered by NumerAI

Lottie Adams and 63 other subject Macroeconomics educators are ready to help you.

Ask a new question

Labs

Want to see this concept in action?

NEW

Explore this concept interactively to see how it behaves as you change inputs.

View Labs

Key Concepts

Recommended Videos

Recommended Textbooks

Transcript

00:01 Here we are continuing on with some microeconomics and so the international trade is trading of goods, services and labour.

00:08 So this happens across the border of two countries and so export is when a country is selling their domestically produced products to a foreign country.

00:17 On the other hand, we can look at import, which is when a country is buying goods and services from the foreign country.

00:24 So when export is more than import, then there is a trade surplus and when import is more than export, then there is a trade deficit.

00:32 So looking at part a here, we can calculate the exchange rate between the peso of country w and the dollar of country e.

00:40 So we have e is equal to the price of spam in peso, which is 24 divided by the price of spam in dollar, which is four.

00:49 So therefore we have 24 divided by four.

00:52 And so that gives us six pesos per dollar.

00:55 So the exchange rate between pesos in country w and dollar in country e is six pesos per dollar.

01:03 Moving on to part b here, so the rule of 70 says that the doubling period of a variable is 70 divided by the average growth rate of that variable.

01:13 So it is given that inflation in country e, we sought to be 3 .5%.

01:18 So it will take 70 divided by 3 .5%.

01:22 So in other words, it will take 20 years to double.

01:26 So after 20 years, the price of spam in the country e will be $8.

01:34 So it was given that the inflation of country w was 7%...

Ace is your personal tutor. It breaks down any question with clear steps so you can learn.

Start Using Ace

Continue solving this problem

Create a free account to:

View full step-by-step solution
Ask follow-up questions with Ace AI
Save progress and study later