1. Explain three factors that would cause the dollar to appreciate.
2. Suppose a Lexus LS400 and a Mercedes C300 are considered to be of equivalent value. The Lexus sells for 6,000,000 Japanese yen in Tokyo and the Mercedes sells for 50,000 euros in Stuttgart. Using the purchasing power parity theory, explain the exchange rate between the yen and the euro.
3. Explain how exchange rates affect the level of aggregate economic activity and the price level. Use appropriate AS/AD diagrams to illustrate your answer.