International Economics Assignment Example | Topics and Well Written Essays - 1250 words

International Economics - Assignment Example Depreciation increases operation and running costs of an organization, especially if it has a lot of imports or outsourced employees. The real exchange rate between the United States and Europe is given by ÃŽ µ. Consider a scenario in which the nominal exchange rate depreciates by 3%, while the price level in Europe increased by 5% and in the United States, it goes up by 2%. What happens to the real exchange rate? In Munich a bratwurst costs 5 euros, a hot dog costs 4$ at Boston’s Fenway Park. At an exchange rate of 1.05 $ per euro, what is the price of a bratwurst in terms of a hot dog? All else equal, how does this relative price change if the dollar depreciates to 1.25$ per euro? Compared with the initial situation, has a hot dog become more or less expensive relative to a bratwurst? Spain and Germany trade a lot between each other. Germany is running an inflation – low, but inflation – and Spain a deflation. Discuss what is expected to happen with the nominal and the real exchange rates between them. The nominal exchange rates of Germany will decrease while the nominal exchange rates for Spain will increase. This is because an increase in commodity prices will cause an increase in the foreign income that is required to purchase local products. The vice versa is true for Spain where a decrease in the price of commodities will reduce the amount of income earned from foreign countries to buy local products. The real exchange rates of Germany will increase. This is because the real exchange rates appreciate an increase in product prices. On the other hand, the real exchange rates of Spain will decrease. This is because real exchange rates depreciate with an increase in product prices.