What type of goods does law of one price hold quite well

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Reference no: EM1369106

Q. 1.List four reasons why deviations from PPP might occur, n, carefully explain how each reason causes such deviations.

2. For what type of goods does law of one price hold quite well?

3. Since PPP rarely holds at any point in time, is re any substantive meaning to terms overvalued or undervalued currency?

4. Suppose U.S dollar price of a big mac is $3.57. price in China is 12.5 yuan. If current exchange rate (yuan per dollar) equals 6.83 yuan per dollar, is yuan over-or undervalued against U.S dollar? (Hint: first determine exchange rate that would equalize dollar value of a Chinese big mac in U.S Big Mac)

5. Suppose that on January 1, yen price of dollar is 120. Over years, Japanese inflation rate is 5 percent and U.S inflation rate is 10 percent. If exchange rate is $1=Y130 at end of year, does yen appear to be overvalued, undervalued, or at PPP level? Explain your answer.

Reference no: EM1369106

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