Author Question: If the purchasing power of the dollar is less than the purchasing power of the British pound, ... (Read 127 times)

future617RT · **on:** Jun 29, 2018

If the purchasing power of the dollar is less than the purchasing power of the British pound, purchasing power parity predicts that the exchange rate will

A) decrease if the exchange rate is less than 1 pound per dollar.
B) be equal to the relative purchasing power across the currencies in the long run.
C) increase if the exchange rate is greater than 1 pound per dollar.
D) All of the above are correct.

Question 2

Explain how we read the three graphs in Figs. A1.1 and A1.2.

What will be an ideal response?

alexanderhamilton · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

B

Answer to Question 2

The points in the graphs relate the quantity of the variable measured on the one axis to the quantity of the variable measured on the other axis. The quantity of the variable measured on the horizontal axis (the x-axis) is measured by the horizontal distance from the origin to the point. Similarly, the quantity of the variable measured on the vertical axis (the y-axis) is measured by the vertical distance from the origin to the point. The point relates these two quantities. For instance, in Figure A1.2a, point A shows that at a price of 1.37 per song, 3.8 million songs are downloaded.