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A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity
David T. Mitchell St. Mary's College, California; University of South Alabama Robert Rebelein Vassar College - Department of Economics Patricia Higino Schneider Agnes Scott College Nicole B. Simpson Colgate University - Economics Department Eric O'Neill Fisher California Polytechnic State University, San Luis Obispo - Orfalea College of Business October 12, 2006 Abstract: We develop a classroom experiment on exchange rate determination appropriate for undergraduate courses in macroeconomics and international economics. Students represent citizens from different countries and need to obtain currency to purchase goods. By participating in a sealed bid auction to buy currency, students gain a better understanding of currency markets and the determination of exchange rates. The implicit framework for exchange rate determination is one in which prices are perfectly flexible (in the long run) so that purchasing power parity (PPP) prevails. Additional treatments allow students to examine the impact of transport costs, nontradable goods and tariffs on the exchange rate and to explore possible deviations from PPP.
JEL Classifications: A22, F31 Working Paper SeriesDate posted: November 09, 2006 ; Last revised: November 09, 2006Suggested CitationContact Information
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