Question Richland and Poorland each have two industries: traded food and nontraded house maintenance. It takes one day for a worker in each country to maintain a house . It takes two days for a Richland worker to produce a unit of food and six days for a Poorland worker to produce a unit of food. The wage rate in Richland is $100 per day, and the wage rate in Poorland is 400 pesos per day. A) What is the equilibrium exchange rate? (measured in pesos per dollar) B) What is the dollar price of house maintenance in Richland? In Poorland? C) Suppose that productivity in Poorland’s farming industry improves, so that it now only takes 4 days of labor to produce a unit of food. If the government of Poorland wishes to keep the peso per dollar exchange rate fixed at the level you calculated in part A, what must the new peso wage be in Poorland? Assume there are no changes in Richland’s economy. D) Continuing with part C, use the new peso wage to calculate the new peso prices of food and house maintenance in Poorland and compare these with the original peso prices.Has Poorland experienced inflation of deflation? Answer this question by calculating the economy wide inflation rate as a simple average of the percentage changes in peso prices of food and house maintenance. percentage changes should be calculated as the change in the natural log of the variable.
Question
Richland and Poorland each have two industries: traded food and nontraded house maintenance. It takes one day for
a worker in each country to maintain a house . It takes two days for a Richland worker to produce a unit of food and six days for a Poorland worker to produce a unit of food. The wage rate in Richland is $100 per day, and the wage rate in Poorland is 400 pesos per day.
A) What is the equilibrium exchange rate? (measured in pesos per dollar)
B) What is the dollar price of house maintenance in Richland? In Poorland?
C) Suppose that productivity in Poorland’s farming industry improves, so that it now only takes 4 days of labor to produce a unit of food. If the government of Poorland wishes to keep the peso per dollar exchange rate fixed at the level you calculated in part A, what must the new peso wage be in Poorland? Assume there are no changes in Richland’s economy.
D) Continuing with part C, use the new peso wage to calculate the new peso prices of food and house maintenance in Poorland and compare these with the original peso prices.Has Poorland experienced inflation of deflation? Answer this question by calculating the economy wide inflation rate as a simple average of the percentage changes in peso prices of food and house maintenance. percentage changes should be calculated as the change in the natural log of the variable.
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