You are given the following information. The current dollar/euro exchange rate is 1.25 dollars per euro. A U.S. basket that costs $100 would cost 64 euro in the euro area. For the next year, the Fed is predicted to keep U.S. inflation at 3% and the ECB is predicted to keep euro area inflation at 1%. The speed of convergence to absolute PPP is 15% per year. e. What is the expected U.S. minus euro area inflation differential for the coming year? f. What is the expected rate of nominal depreciation for the United States (versus the euro)?

You are given the following information. The current dollar/euro exchange rate is 1.25 dollars per euro. A U.S. basket that costs $100 would cost 64 euro in the euro area. For the next year, the Fed is predicted to keep U.S. inflation at 3% and the ECB is predicted to keep euro area inflation at 1%. The speed of convergence to absolute PPP is 15% per year. e. What is the expected U.S. minus euro area inflation differential for the coming year? f. What is the expected rate of nominal depreciation for the United States (versus the euro)?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

You are given the following information. The
current dollar/euro exchange rate is 1.25
dollars per euro. A U.S. basket that costs $100
would cost 64 euro in the euro area. For the
next year, the Fed is predicted to keep U.S.
inflation at 3% and the ECB is predicted to
keep euro area inflation at 1%. The speed of
convergence to absolute PPP is 15% per year.
e. What is the expected U.S. minus euro area
inflation differential for the coming year?
f. What is the expected rate of nominal
depreciation for the United States (versus the
euro)?

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