EIFM Seminar 5 – week commencing Nov 8th 2021

Question 1: When the euro appreciates, are you more likely to drink California wine or French wine?

Question 2: “A country is always worse off when its currency is weak (falls in value).” Is this statement true, false, or uncertain? Explain your answer.

Question 3: When the U.S. dollar depreciates, what happens to exports and imports in the United States?

Question 4: If the Japanese price level rises by 5% relative to the price level in the United States, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of dollars?

Question 5: Explain the difference between absolute PPP and relative PPP. How might the distinction between traded and non-traded goods be relevant to testing for PPP?

Question 6: Explain with reference to the Balassa-Samuelson model why it is that the price of non-traded goods are cheaper in developing countries than in developed countries.

Question 7: Explain what you understand by purchasing power parity theory. How do you account for its poor performance at explaining exchange rate movements since 1973?