Suppose that the Price ratio of Country A to Country B is 2 (on average...
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Accounting
Suppose that the Price ratio of Country A to Country B is 2 (on average the prices are twice as expensive in Country A than in Country B). 1) Assume that there is no transaction costs and trade restrictions. Calculate the long-run nominal exchange rate and explain why. 2) Suppose that the interest rate in Country B increases. Show graphically and explain what is the effect of this on the exchange rate between the two countries.
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