Problem on nominal exchange rate

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Reference no: EM131835453

Question: a. Suppose that the price level in the United States doubled, while the price level in the U.K. remained unchanged. According to purchasing power parity theory, would the dollar/pound nominal exchange rate double or would it fall in half?

b. In practice, PPP tends to hold more true in the long run than in the short run, because many prices are sticky. So if the U.S. money supply increased dramatically-a big enough rise for the price level to double in the long run-would this be good news for British tourists headed to the United States or would it be good news for U.S. tourists headed to Britain? Incidentally, would this be good news or bad news (in the short run) for U.S. tourists staying in the United States?

Reference no: EM131835453

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