Opportunities for Discussion

1. What conditions must hold for purchasing power parity to be effective?

2. The prices of Big Macs differ substantially (often by $2 to $3) across countries when measured in a common currency. What explains this apparent deviation from purchasing power parity?

3. What is arbitrage, and why is it important in goods and capital markets?

4. In recent years Australian government bonds have yielded 18 to 20 percent in nominal terms. Why aren't all portfolios dominated by these bonds?

5. What are the effects of domestic monetary and fiscal policies on the value of the domestic currency, on the domestic interest rate, and on economies in the rest of the world?

6. Why do countries choose not to coordinate their macroeconomic policies?