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Required: a. Indicate whether the following statement is True of False. (4 marks) i) The real exchange rate is not equal to 1, if the absolute purchasing power parity is not violated. ii) The real exchange rate is not constant over time, if the relative purchasing power parity is not violated. iii) The deviation from absolute purchasing power parity is constant in percentage, if the relative purchasing power parity is violated. iv) The real exchange rate will fluctuate from time to time, if the deviation from absolute purchasing power parity varies over time. b. Suppose that the New Zealand price level is initially NZD15,000 per NZ consumption bundle, and the price level in Australia is initially AUD11,000 per Australian consumption bundle. With the nominal spot exchange rate equal to NZD1.40/AUD, what is the current real exchange rate? (1 mark) C. Suppose that over the next year, there is 3% inflation in NZ, there is 2% inflation in Australia, and the nominal exchange rate changes so that relative purchasing power parity is satisfied. What is the expected nominal exchange rate after 1 year? (1 mark) d. Suppose that the AUD actually appreciates in nominal terms by 2% relative to the NZD during the year (ex post). i) What turns out to be the actual nominal exchange rate after 1 year? (1 mark) ii) What is the ex post rate of change in real exchange rate? (2 marks) iii) Has the AUD appreciated or depreciated in real terms? (1 mark) iv) What is the new real exchange rate after 1 year? (2 marks) v) Based on the real exchange rate observed over the year, is the relative purchasing power parity found to be satisfied or not and what is the reason for your answer? (2 marks) Required: a. Indicate whether the following statement is True of False. (4 marks) i) The real exchange rate is not equal to 1, if the absolute purchasing power parity is not violated. ii) The real exchange rate is not constant over time, if the relative purchasing power parity is not violated. iii) The deviation from absolute purchasing power parity is constant in percentage, if the relative purchasing power parity is violated. iv) The real exchange rate will fluctuate from time to time, if the deviation from absolute purchasing power parity varies over time. b. Suppose that the New Zealand price level is initially NZD15,000 per NZ consumption bundle, and the price level in Australia is initially AUD11,000 per Australian consumption bundle. With the nominal spot exchange rate equal to NZD1.40/AUD, what is the current real exchange rate? (1 mark) C. Suppose that over the next year, there is 3% inflation in NZ, there is 2% inflation in Australia, and the nominal exchange rate changes so that relative purchasing power parity is satisfied. What is the expected nominal exchange rate after 1 year? (1 mark) d. Suppose that the AUD actually appreciates in nominal terms by 2% relative to the NZD during the year (ex post). i) What turns out to be the actual nominal exchange rate after 1 year? (1 mark) ii) What is the ex post rate of change in real exchange rate? (2 marks) iii) Has the AUD appreciated or depreciated in real terms? (1 mark) iv) What is the new real exchange rate after 1 year? (2 marks) v) Based on the real exchange rate observed over the year, is the relative purchasing power parity found to be satisfied or not and what is the reason for your answer? (2 marks)

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