# And to what extent (in terms of percentages)?

US 105 1 Show more Problem Given the following hypothetical data on price indexes for the US and EU 2009 2010 US 105 118 EU 95 100 a) What is the inflation rate of 2010in US? (10 pts) b) What is the inflation rate of 2010 in EU.? (10 pts) c) Based on PPP what is the long-run equilibrium dollar/euro exchange rate for 2009? Note that the exchange rate must be expressed by the spot price of euros in terms of dollars. (15 pts) d) Based on PPP what is the long-run equilibrium dollar/euro exchange rate for 2010? Note that the exchange rate must be expressed by the spot price of euros based on dollars. (15 pts) e) Suppose that the actual exchange rate always follows the PPP-determined exchange rate. Then did the euro appreciate or depreciate against the U.S. dollar in 2010? And what was the appreciation (or depreciation) rate in 2010? (10 pts) f) From your result of (e) and the price indexes Explain how international inflation rates resulted in the change in the exchange rate (from 2009 to 2010) you computed above for part (e). (10 pts) g) Suppose that the actual exchange rate may deviate from the PPP-determined exchange rate as in the real world. If the actual exchange rate was one euro for one dollar in 2009 then which currency was overvalued against the PPP benchmark? And to what extent (in terms of percentages)? (15 pts) h) Once again suppose that the actual exchange rate may deviate from the PPP-determined exchange rate as in the real world. If the actual exchange rate was one euro for two dollars in 2010 then which currency was overvalued against the PPP benchmark? And to what extent (in terms of percentages)? (15 pts) Note: You must show your computation for the question that requires numerical results. Show less

### QUICK QUOTE

Approximately 250 words
\$12