What is the expected rate of nominal depreciation

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Reference no: EM131902962

You are given the following information. The current dollar/euro exchange rate is $1.5 per euro. A U.S. basket that costs $100 would cost 60 euro (or the equivalent of 90$) in the euro area. For the next year, the Fed is predicted to keep U.S. inflation at 2% and the ECB is predicted to keep euro area inflation at 1%. The speed of convergence to absolute PPP is 15% per year. What is the expected rate of nominal depreciation for the United States (versus the euro)?

Reference no: EM131902962

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