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1. What market forces prevent absolute PPP from holding in real economies? Which of these represent unexploited profit opportunities?
2. Why is it better to use a PPP exchange rate to compare incomes across countries than an actual exchange rate?
3. What is relative PPP, and why does it represent a weaker relationship between exchange rates and prices than absolute PPP?
4. What is the real exchange rate, and how are fluctuations in the real exchange rate related to deviations from absolute PPP?
5. If the nominal exchange rate between the Mexican peso and the U.S. dollar is fixed, and there is higher inflation in Mexico than in the United States, which currency experiences a real appreciation and which experiences a real depreciation? Why? What is likely to happen to the balance of trade between the two countries?
Once you have shown that on your graph, you must state what happened to equilibrium price and quantity. Now remember, when demand and supply change, you will not be able to determine either the direction of price or quantity.
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