problem 5 chapter 16 17 law of one price ppp and output and forelgn ex
Problem 5- Chapter 16, 17 (Law of One Price, PPP, and Output and Forelgn Exchange Markets, 20polnts) a)Given the table below for the market for sweaters in different countries and the US, and assuming the Law of One Price holds individually in each country calculate the exchange rate between the dollar and the euro.
b) Given that the current exchange rate is $0.85/1€, for each country predict if there will be either a depreciation or appreciation in $ vs. the euro according to PPP? Explain your motivation.(Assume no transportation costs between each EU country and the US.) c) Describe the differences between relative PPP and absolute PPP and what are the main issues with this theory in predicting exchange rates. d) Using the DD and AA schedule representing the simultaneous equilibrium in the output market,money market and foreign exchange market explain in a graphical analysis how changes in monetary policy and fiscal policy can bring the economy back to full employment during a recession.
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