a) Show that when relative PPP holds, r(AU) = r(EU). Note: r denotes real interest rate. b)...

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Economics

a) Show that when relative PPP holds, r(AU) = r(EU). Note: rdenotes real interest rate.
b) Assume that worker productivity is expected to increase inthe European tradables sector in the future. Assume further thatworker productivity is expected to stagnate in Europeannon-tradables sector as well as in all Australian sectors(tradables and non-tradables) in the future. What implication doesthis have on the difference between real interest rates inAustralia and Europe?
c) Do real interest differences imply unnoticed profitopportunities for international investors? Explain.

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3.8 Ratings (412 Votes)

A The relative price levels determine the exchange rate If the price level in the US is US200 per consumption basket while the price level in Canada is C400 per basket PPP implies that the USC exchange rate should be US200C400 US 1C 2 Purchasing power parity says that each countrys currency has the same purchasing power 2 Canadian dollars buy the same amount of goods and services as does 1 US dollar since prices in Canada are twice as high Equivalently PPP states that countries price levels are equal when measured in the same currency B An anticipated world See Answer

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