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What are the expected price levels and the nominal spot rate

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Suppose that for the same basket of goods the time zero price indices in countries D and F are P0D = D100 and P0F = F1, so that S0D/F = P0D/P0F = D100/F. Inflation rates in countries D and F are expected to be 10 percent and 21 percent per period, respectively, over the foreseeable future.

a. What are the expected price levels E[P1D] and E[P1F] and the expected nominal spot rate of exchange E[S1D/F] in one period?

b. Looking two years into the future, what are the expected future price levels E[P2D] and E[P2F] in these two countries?

Reference no: EM13871926

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