Given the following hypothetical data on price indexes for the US and EU, What i
ID: 1200941 • Letter: G
Question
Given the following hypothetical data on price indexes for the US and EU, What is the inflation rate of 2010m 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=12.24%
Inflation rate= (p2-p1)*100/p1
2009 2010 P2-p1 Inflation rate
US 98 110 12 12.24
EU 100 105 5 5
b.
Inflation rate=5%
c.
let the spot price of euro = x dollar/euro
in PPP term exchange rate are adjusted so that an identical good in two different countries has the same price when expressed in the same currency.
US Price index=98
EU price index=100
Spot exchange rate= x*p2/p1=x100/98
d.
US Price index=110
EU price index=105
Spot exchange rate= x*p2/p1=x105/110
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