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By how much has the euro appreciated or depreciated

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Question - Suppose the spot exchange rate for the euro two years ago was $1.25/€, while the spot exchange rate today is $1.20/€. Over the past two years, suppose that inflation in Euroland has been 4% per year, while inflation in the U.S. has been 1% per year. (20%)

a. By how much has the euro appreciated or depreciated in nominal terms (i.e., in the market) over the past two years?

b. According to PPP, by how much should euro appreciate or depreciate over the past two years? What would PPP have predicted today's exchange rate to be?

c. Given the numbers in this problem, do Euroland goods seem cheaper or more expensive to Americans now relative to two years ago? Explain (no points given without explanation)

Reference no: EM133001638

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