Given the following hypothetical data on price indexes for the US and EU, What i
ID: 1200936 • Letter: G
Question
Given the following hypothetical data on price indexes for the US and EU, What is the inflation rate of 2010in US? What is the inflation rate of 2010 in EU.? 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. 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.Explanation / Answer
a)
Inflation rate in US = (110 – 98)/98
= 2/ 98
= 0.20
b)
Inflation rate in EU = (105 – 100)/ 100
= 5/ 100
= 0.05
Based on PPP what is the long run Equilibrium
E = P domestic/ P foreign
c)
In 2009 E = 98/100
0.98
d)
In 2010 E = 110 /105
= 1.04
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