Answer to Question #329853 in Macroeconomics for Bilal

Question

Suppose the nominal exchange rate is 1,000 Chilean pesos per UK pound. Further, suppose the price of a bushel of UK wine is £5 per bottle and the price of a bottle of Chilean wine is 7,500 pesos. (UK is a domestic country and Chile is a foreign country).

a. What is the real exchange rate between Chile and the UK in terms of wine? b. Does a pound have purchasing power parity in the UK and Chile?

c. Is there a profit opportunity that you could exploit with arbitrage? Where would you buy and where would you sell?

d. If the nominal exchange rate stayed the same, what should happen to the price of wine in the UK and Chile? Explain.

Answer 1

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