Arbitrage in Goods Markets
1. What is the diff erence between Absolute and Relative PPP? Which theory requires fewer assumptions?
2. Give two reasons why Absolute PPP might not hold in the short-run.
3. Is there empirical evidence in favour of either Absolute or Relative Purchasing Power Parity, and which has more empirical support?
Money and Asset Market Equilibrium
1. Derive and explain the Fisher E ect. Is the Fisher Eff ect more likely to hold in the short-run or the long-run, and explain why.
2. What are the implications of the Fisher E ffect for real interest rate di erentials between countries?
3. What determines a country's long-run nominal interest rate?
4. Assume that goods prices are sticky in the short-run and can change only gradually. Explain the initial impact of a doubling of Ms on US nominal interest rates. What will happen to US nominal interest rates over the long-run as goods prices react?