Question

10 multiple choice 2 points
suppose the current exchange rate between the u.s. dollar and the mexican peso is \\$0.10 = 1 peso. furthermore, suppose the price level in mexico rises 15 percent while the u.s. price level remains constant. according to the purchasing power parity theory, which of the following exchange rates comes closest to being the equilibrium exchange rate?
\\$0.085 = 1 peso
\\$0.115 = 1 peso
\\$0.087 = 1 peso
\\$0.13 = 1 peso

11 multiple choice 2 points
if an international currency speculator expects that country a will soon be forced to devalue its currency, the speculator will
sell all of his holdings of that currency.
not be concerned because the devaluation will affect only the domestic prices of goods within country as borders, not international prices.
not be concerned because only a revaluation will affect his or her profits.
buy as much of that currency as possible.

Explanation:

Calculate PPP exchange rate adjustment

Using the Exchange Rate Adjustment knowledge point

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Identify closest option for Question 10

Using the Exchange Rate Adjustment knowledge point

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Analyze speculator behavior under devaluation expectation

Using the Currency Depreciation Effects knowledge point

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Answer:

Question 10

• (A) $0.085 = 1 peso
• (B) $0.115 = 1 peso
• (C) $0.087 = 1 peso (Correct answer)
• (D) $0.13 = 1 peso

Question 11

• (A) sell all of his holdings of that currency. (Correct answer)
• (B) not be concerned because the devaluation will affect only the domestic prices of goods within country A's borders, not international prices.
• (C) not be concerned because only a revaluation will affect his or her profits.
• (D) buy as much of that currency as possible.