Problem
1. Why is relative purchasing power parity (PPP) more likely to hold in a hyperinflationary period than in a more "normal" period of price behavior?
2. Do you think that the monetary approach is a satisfactory explanation of a country's exchange rate? Why or why not?
3. In the portfolio balance model, what effect, other things equal, will a foreign government's budget deficit financed by issuing bonds have on the home country's currency value and why? (Assume a flexible exchange rate.)