CHAPTER 21 B-345
c. True. The market would only be correct on average, while you would be correct all the time.
9. a. American exporters: their situation in general improves because a sale of the exported goods for a
fixed number of euros will be worth more dollars.
American importers: their situation in general worsens because the purchase of the imported goods
for a fixed number of euros will cost more in dollars.
b. American exporters: they would generally be better off if the British government’s intentions result
in a strengthened pound.
American importers: they would generally be worse off if the pound strengthens.
c. American exporters: would generally be much worse off, because an extreme case of fiscal
expansion like this one will make American goods prohibitively expensive to buy, or else Brazilian
sales, if fixed in reais, would become worth an unacceptably low number of dollars.
American importers: would generally be much better off, because Brazilian goods will become
much cheaper to purchase in dollars.
10. IRP is the most likely to hold because it presents the easiest and least costly means to exploit any
arbitrage opportunities. Relative PPP is least likely to hold since it depends on the absence of market
imperfections and frictions in order to hold strictly.
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps.
Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
1. Using the quotes from the table, we get:
a. $100(€0.6509/$1) = €65.09