Naufal Putra N

041711333262

1. Suppose that the country Argonia follows a flexible exchange rate regime. The
exchange rate between the Argonian dollar (AGD) and the U.S. dollar (USD) is
currently 1 AGD = 3 USD.
A. Use a graph to show the equilibrium in the foreign exchange market with the U.S.
dollar-Argonian dollar exchange rate on the vertical axis and the quantity of
Argonian dollars on the horizontal axis.

B. Suppose that the global demand for apricots grown in Argonia increases sharply.
Other things being unchanged, how would this affect the value of the Argonian
dollar? Use the graph to explain.
Naufal Putra N
041711333262

2. Suppose that country Lova has zero net exports. Use the labor market diagram to
explain how country Hapa’s expansionary monetary policy affects Lova’s
employment. Assume that the real exchange rate usually follows the nominal
exchange rate, and the nominal prices in each country remain the same.

3. Purchasing power parity (PPP) implies that the price levels of two baskets of goods
in two countries, the U.S. And Japan, are equal when expressed in a common
currency. If PPP holds, what would the real exchange rate be?

PPP explains the relationship between product price levels and exchange rates. If the exchange
rate between two currencies is equal to the ratio of average price levels between two countries,
then the absolute PPP holds.

4. Thailand and Taiwan are both rapidly growing economies in East and Southeast Asia
that trade actively with other countries. Suppose rice wine is the only good produced
in Thailand and Taiwan. A bottle of wine costs 100 bhat in Thailand and 200 NT (New
Taiwan dollars) in Taiwan. The nominal exchange rate is 0.5 bhat per NT. Calculate
the real exchange rate from Thailand’s perspective (that is, using Thailand as the
“domestic” economy). Show your work. Intuitively, what does this number
represent?

The real exchange rate is 1 Taiwanese computer circuit board per Thai computer circuit board.
The real exchange rate formula is where e is the nominal exchange rate and E is the real exchange
rate. The nominal exchange rate from the Thai perspective is 2 NT per bhat. Therefore, E = [(100
bhat) × (2 NT per bhat)] / 200 NT = 1. This represents the number of Taiwanese computer circuit
boards it takes to buy one Thai computer circuit board.