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Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).?
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Suppose Ethiopia’s inflation rate is 100 percent over one year but the...
Relative Purchasing Power Parity (PPP)
Relative Purchasing Power Parity (PPP) is an economic theory that suggests that the exchange rate between two countries should adjust in response to differences in inflation rates. According to PPP, if the inflation rate in one country is higher than in another country, the currency of the country with higher inflation should depreciate relative to the currency of the country with lower inflation.
a. Impact of Inflation Rates on Exchange Rate
In this case, Ethiopia's inflation rate is significantly higher than that of the United States. According to relative PPP, the Ethiopian birr exchange rate against the US dollar should depreciate over the year.
b. Impact of Tripled Price Level on Exchange Rate
If the Ethiopian price level were to triple, it means that the inflation rate in Ethiopia has increased significantly. To determine the new exchange rate under relative PPP, we can use the formula:
Exchange Rate = Initial Exchange Rate × (1 + Inflation Rate in Foreign Country)/(1 + Inflation Rate in Domestic Country)
Let's assume the initial exchange rate is 1 Ethiopian birr = 1 US dollar.
Using the formula, we can calculate the new exchange rate as follows:
Exchange Rate = 1 × (1 + 0.05)/(1 + 3) = 1 × 1.05/4 = 0.2625
Therefore, the new exchange rate would be 0.2625 Ethiopian birr per US dollar.
Explanation:
Relative PPP suggests that exchange rates should adjust to reflect differences in inflation rates between countries. In the case of Ethiopia and the United States, where Ethiopia has a much higher inflation rate, the Ethiopian birr should depreciate relative to the US dollar. This means that it would take more Ethiopian birr to purchase one US dollar.
When the price level in Ethiopia triples, it indicates a significant increase in inflation. Applying the relative PPP formula, we can calculate the new exchange rate. The result shows that the Ethiopian birr would depreciate even further, with 0.2625 Ethiopian birr being needed to buy one US dollar.
In summary, according to relative PPP, the Ethiopian birr should depreciate against the US dollar due to the higher inflation rate in Ethiopia. If the Ethiopian price level were to triple, the exchange rate would further decrease, indicating a higher depreciation of the Ethiopian birr.
Relative Purchasing Power Parity (PPP) is an economic theory that suggests that the exchange rate between two countries should adjust in response to differences in inflation rates. According to PPP, if the inflation rate in one country is higher than in another country, the currency of the country with higher inflation should depreciate relative to the currency of the country with lower inflation.
a. Impact of Inflation Rates on Exchange Rate
In this case, Ethiopia's inflation rate is significantly higher than that of the United States. According to relative PPP, the Ethiopian birr exchange rate against the US dollar should depreciate over the year.
b. Impact of Tripled Price Level on Exchange Rate
If the Ethiopian price level were to triple, it means that the inflation rate in Ethiopia has increased significantly. To determine the new exchange rate under relative PPP, we can use the formula:
Exchange Rate = Initial Exchange Rate × (1 + Inflation Rate in Foreign Country)/(1 + Inflation Rate in Domestic Country)
Let's assume the initial exchange rate is 1 Ethiopian birr = 1 US dollar.
Using the formula, we can calculate the new exchange rate as follows:
Exchange Rate = 1 × (1 + 0.05)/(1 + 3) = 1 × 1.05/4 = 0.2625
Therefore, the new exchange rate would be 0.2625 Ethiopian birr per US dollar.
Explanation:
Relative PPP suggests that exchange rates should adjust to reflect differences in inflation rates between countries. In the case of Ethiopia and the United States, where Ethiopia has a much higher inflation rate, the Ethiopian birr should depreciate relative to the US dollar. This means that it would take more Ethiopian birr to purchase one US dollar.
When the price level in Ethiopia triples, it indicates a significant increase in inflation. Applying the relative PPP formula, we can calculate the new exchange rate. The result shows that the Ethiopian birr would depreciate even further, with 0.2625 Ethiopian birr being needed to buy one US dollar.
In summary, according to relative PPP, the Ethiopian birr should depreciate against the US dollar due to the higher inflation rate in Ethiopia. If the Ethiopian price level were to triple, the exchange rate would further decrease, indicating a higher depreciation of the Ethiopian birr.
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Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).?
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Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).? for Economics 2024 is part of Economics preparation. The Question and answers have been prepared according to the Economics exam syllabus. Information about Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).? covers all topics & solutions for Economics 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).?.
Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).? for Economics 2024 is part of Economics preparation. The Question and answers have been prepared according to the Economics exam syllabus. Information about Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).? covers all topics & solutions for Economics 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Suppose Ethiopia’s inflation rate is 100 percent over one year but the inflation rate in US is only 5 percent. a. According to relative PPP, what should happen over the year to the Ethiopian birr exchange rate against the US dollar? (1.5 point). b. If the Ethiopian price level were to triple, what would be the Ethiopian birr exchange rate against the US dollar? (Hint: use relative PPP) (2 points).?.
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