Short Answer/Discussion

1. What are nominal exchange rates? Describe the market in which they are used.

   <<textbox>>

   <<Feedback:>>The nominal exchange rate is the rate at which one currency can be traded for another currency. These are the rates used when currency is traded in global financial markets. The foreign exchange market is the world’s largest trading market surpassing the total values of stocks and bonds traded in world markets. (Answers may vary.)

2. Why is purchasing power parity rare?

   <<textbox>>

   <<Feedback:>>Suggested solution: An example of purchasing power parity would be a quart of milk costing $2.00 in the United States and for the equivalent of $2.00 in yen when the quart is purchased in Japan. This rarely happens because (1) many locally performed services cannot be traded, (2) labor costs differ from country to country, and (3) it is impractical to trade certain goods because of transportation costs. (Answers may vary.)

3. How would ending China’s alleged currency manipulation affect producers and consumers in countries such as the United States?

   <<textbox>>

   <<Feedback:>>Suggested solution: It is alleged that China’s government keeps the yuan relatively weak against the U.S. dollar. This means that Chinese goods are less expensive in the U.S. market than they would be otherwise. Because Chinese goods are inexpensive, U.S. consumers benefit from low prices and increased purchasing power. Because the needs of U.S. consumers are being met by Chinese producers, less is required from U.S. manufactures, reducing output and employment in domestic U.S. industries. (Answers may vary.)