Suppose That the Half-Life of Deviations from PPP Is Five

question 56

Multiple Choice

Suppose that the half-life of deviations from PPP is five years (it takes five years for the difference between the actual and equilibrium real exchange rate to narrow by half) and the nontraded share of consumption is 0.50. What will be the annual rate of change of the real exchange rate if a country initially has a 20% gap between its actual and equilibrium real exchange rates and its GDP is growing 5% faster than GDP in the rest of the world?

• A) 70%
• B) 22%
• C) 4.5%
• D) 2.0%

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Definitions:

Bundle Pricing

A pricing strategy where multiple products or services are sold together at a single price, often at a discount compared to purchasing each item separately.

Standard Markup

The typical percentage added to the cost price of goods to determine the selling price.

Penetration

The process of entering or making an entrance into a market with the aim to establish a significant foothold or presence.

Bundle Pricing

A marketing strategy where multiple products or services are packaged together and sold at a single price.