Problem
1. What is the foreign exchange market? Describe the two types of transactions that take place in this market.
2. Differentiate the nominal and real exchange rates between dollars and euros. Do the two exchange rates move together? Why is appreciation or depreciation of real exchange rates important?
3. How is the theory of purchasing power parity related to the law of one price? Why doesn't PPP hold in the short run?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.