To answer the following question, please refer to the figure below. Concentrating only at the lower left quadrant, discuss the relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E
What will be an ideal response?
The lower left quadrant in the figure described the Purchasing Power Parity (PPP) relationship. The relationship between the U.S. real money supply and the dollar/euro exchange rate, E$/E is negative.
is equal to the price level ratio, PUS/ .
In this derivation of the relationship, the following variables are assumed constants: , , and .
So, = /PUS
PUS ↑ → ↑
→
Thus, the purchasing power of dollar decreases due to the increase in the price level.
→
i.e., dollar depreciates due to PPP
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A) store of value. B) medium of exchange. C) barter token. D) unit of account. E) unit of currency.
If interest rates fall, the opportunity cost of spending money today rather than tomorrow
A. rises. B. falls. C. rises only if the prices of goods today rise. D. falls only if the prices of goods today fall.