QUESTION 1 A certain truck costs Mex$120,000 in Mexico. If the current exchange

Question

QUESTION 1 A certain truck costs Mex$120,000 in Mexico. If the current exchange rate is C$.0833/Mex$, the truck should cost C$9996 (rounded to the nearest whole Canadian dollar) in Canada according to absolute PPP. True False QUESTION 2 Relative PPP states that nominal exchange rate fluctuations are due to differences in inflation between two countries True False QUESTION 3 Empirical studies have shown that relative PPP can be used to derived accurate long-term forecasts of future exchange rates. OTrue False

Explanation / Answer

1.

Cost

=

Mex$120000

Exchange Rate

=

C$0.0833/Mex$

Exchange rate in terms of Mex$

=

1Mex$=1/.0833C$

Cost

=

120000/0.0833

=

C$1440576

Therefore, it is false.

2. True but at the end the amount would remain same.

3.True

Cost

=

Mex$120000

Exchange Rate

=

C$0.0833/Mex$

Exchange rate in terms of Mex$

=

1Mex$=1/.0833C$

Cost

=

120000/0.0833

=

C$1440576

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