Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 5

Imagine there are only two trading nations in the world. For each of the following scenarios, determine whether goods in one country will become more attractive relative to goods in the other country given their inflation rates and a shift in the nominal exchange rates.
a. Inflation is 8 percent in the UK and 4 percent in Germany, but the UK pound-euro exchange rate remains the same.
b. Inflation is 3 percent in the U.S. and 7 percent in Japan, but the exchange rate for U.S. dollars to Japanese yen increases from 70 to 80 Japanese yen.
c. Inflation is 10 percent in the U.S. and 6 percent in Mexico, and the price of the Mexican peso rises from US$0.08 to US$0.15.