2. Assume that the current dollar-Euro exchange rate (Ese) is equal to 1, the real exchange rate (qus/Eur) = 1.33, the price level (P) equals 1.5 in the U.S. and 2 in Europe. Assume that relative PPP holds. a. If inflation is 4% in the U.S. but 2% in Europe, what will be the price levels in the U.S. and Europe a year from now? b. What will the nominal exchange rate (Ese) be a year from now? c. What will the real exchange rate (qus/Eur) be a year from now?

ENGR.ECONOMIC ANALYSIS
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2. Assume that the current dollar-Euro exchange rate (Ese) is equal to 1, the real exchange
rate (qus/Eur) = 1.33, the price level (P) equals 1.5 in the U.S. and 2 in Europe. Assume
that relative PPP holds.
a. If inflation is 4% in the U.S. but 2% in Europe, what will be the price levels in the
U.S. and Europe a year from now?
b. What will the nominal exchange rate (Ese) be a year from now?
c. What will the real exchange rate (qus/Eur) be a year from now?
Transcribed Image Text:2. Assume that the current dollar-Euro exchange rate (Ese) is equal to 1, the real exchange rate (qus/Eur) = 1.33, the price level (P) equals 1.5 in the U.S. and 2 in Europe. Assume that relative PPP holds. a. If inflation is 4% in the U.S. but 2% in Europe, what will be the price levels in the U.S. and Europe a year from now? b. What will the nominal exchange rate (Ese) be a year from now? c. What will the real exchange rate (qus/Eur) be a year from now?
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