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A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity

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  • David T. Mitchell
  • Robert P. Rebelein
  • Patricia H. Schneider
  • Nicole B. Simpson
  • Eric Fisher

Abstract

The authors developed a classroom experiment on exchange rate determination appropriate for undergraduate courses in macroeconomics and international economics. In the experiment, students represent citizens from different countries and need to obtain currency to purchase goods. By participating in an auction to buy currency, students gain a better understanding of currency markets and 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 effects of price changes, tariffs, and nontradable goods on the exchange rate and to explore the possible resulting deviations from PPP. The experiment is suitable for classes of 8 to 50 students and can be run in as short a period as 30 minutes.

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File URL: http://hdl.handle.net/10.3200/JECE.40.2.150-165
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The Journal of Economic Education.

Volume (Year): 40 (2009)
Issue (Month): 2 (April)
Pages: 150-165

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Handle: RePEc:taf:jeduce:v:40:y:2009:i:2:p:150-165

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References

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  1. Taylor, Alan M & Taylor, Mark P, 2004. "The Purchasing Power Parity Debate," CEPR Discussion Papers 4495, C.E.P.R. Discussion Papers.
  2. Denise Hazlett, 2003. "A Search-Theoretic Classroom Experiment with Money," International Review of Economic Education, Economics Network, University of Bristol, vol. 2(1), pages 80-90.
  3. Charles A. Holt, 1999. "Teaching Economics with Classroom Experiments: A Symposium," Southern Economic Journal, Southern Economic Association, vol. 65(3), pages 603-610, January.
  4. Brauer, Jurgen & Delemeester, Greg, 2001. " Games Economists Play: A Survey of Non-computerized Classroom-Games for College Economics," Journal of Economic Surveys, Wiley Blackwell, vol. 15(2), pages 221-36, April.
  5. Lisa R. Anderson & Sarah L. Stafford, 2006. "Does Crime Pay? A Classroom Demonstration of Monitoring and Enforcement," Southern Economic Journal, Southern Economic Association, vol. 72(4), pages 1016–1025, April.
  6. Denise Hazlett & Cynthia D. Hill, 2003. "Calculating the Candy Price Index: A Classroom Inflation Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 34(3), pages 214-223, January.
  7. Bradley T. Ewing & Jamie B. Kruse & Mark A. Thompson, 2004. "Money Demand and Risk: A Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 35(3), pages 243-250, July.
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Cited by:
  1. Mitchell, David & Hunsader, Kenneth & Parker, Scott, 2011. "A Futures Trading Experiment: An Active Classroom Approach to Learning," MPRA Paper 56496, University Library of Munich, Germany, revised 2011.
  2. Jannett Highfill & Raymond Wojcikewych, 2011. "The U.S.-China Exchange Rate Debate: Using Currency Offer Curves," International Advances in Economic Research, Springer, vol. 17(4), pages 386-396, November.

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