Chapter 8-9 Notes

Question 1

purchasing power parity

Answer 1

specific theory that describes how a currency is weakened in response to high inflation

Question 2

absolute form of PPP

Answer 2

consumers will shift their demand to wherever the price is lowest

Question 3

relative form of PPP

Answer 3

accounts for such market imperfections as transportation costs, tariffs, and quotas

Question 4

purchasing power parity

Answer 4

Ph(1+Ih)

Question 5

price index

Answer 5

Pf(1+If)
or
Pf(1+If)(1+Ef)

Question 6

percentage change in the value of the foreign currency

Answer 6

Ef = ((1 + Ih)/(1+If))-1
or
Ef = Ih - If

Question 7

purchasing power parity line

Answer 7

.