Purchasing power parity, Suppose two open economies A and

Purchasing power parity

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Reference no: EM1367307

Consider two open economies A (national) and B.
In this economy only one good is produced for time t = 0 and price P(0,A)=1 Dollar and P(0,B) = 1,5 Euro. The nominal exchange rate for that time is E(0)=1,5 Euro/Dollar.

Country A has inflation of Ï?(A) = 10%
Country B has inflation of Ï?(B) = 5%

To which value the nominal exchange rate turns itself at time t = 1, assuming we have the absolute (Purchasing Power Parity)

1) E(1) = 0.75Euro/Dollar
2)E(1) = 0.70Euro/Dollar
3) E(1) = 3Euro/Dollar
4) E(1) = 1,43Euro/Dollar
5) E(1) = 1Euro/Dollar

Please show the way to calculate it.

Reference no: EM1367307

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