Attached are 3 questions on the subject of International Trade and the relationship of trade on inflation and interest rates. Each solution should be at least 150 words minimum and sources should be...

Please answer the 3 questions with a minimum of 150 words for each solution. Please use
USA sources for solutions.
Flexible Exchange Rate:
What are the advantages of flexible exchange rates respect to fixed exchange rates? Are

there disadvantages?
PPP (Purchasing Power Parity):
A Big Mac costs $5 in the U.S. and 7 Euros in Germany. If the exchange rate is 0.6 Euros per
dollar, is the dollar undervalued or overvalued against the Euro? What would you expect to
happen in the currency market? What objection do you have to using this method?
New Trade Theory (Krugman):
Do you think that the new theory of trade explain China’s emergence as the world’s
factory? Explain.
Solutions:
1. A fixed exchange rate system is the one in which a country pegs its currency at a
constant level against another currency i.e. the country fixes its currency against a
single or group of foreign currencies. On the other hand a flexible exchange rate
system is one which allows the currency to change in value as compared to a single
or a group of foreign currencies. Throughout the world different countries follow
different currency regimes i.e. fixed, floating or a managed or semi-fixed. However it
is to be noted that in case of a fixed exchange rate system the economic activities
change and respond to the fixed exchange rate, however in case of a floating
exchange rate system, the exchange rate changes and responds and reflects changes
in the economic activity. As such there are some rationale based on which we can
say that the floating exchange rate system is better than, or has some advantages,
over the fixed exchange rate system. Few of them are below;
a. The country is free to adopt a policy to properly conduct domestic economic
affairs.
b. Floating Exchange Rate system helps as a shock absorber and protects
economic activities from the Global imbalances.
c. The floating exchange rate system also helps in automatically removing and
balancing any disequilibrium in the external accounts.
d. Since it is a flexible float, it means that the rates would be those at which the
markets clear and as such there would be no excess demand or supply of
home or foreign currency in the currency market.
e. Also, the floating or flexible exchange rate system, help in...