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Exchange rate movement Suppose a basket of goods in Paris cost 133 euros and the same basket...

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Finance

Exchange rate movement


Suppose a basket of goods in Paris cost 133 euros and the samebasket purchased in

New York cost $153.

A. At what exchange rate between euros and dollars isthe cost of the basket of goods the same in each City?

B. Now suppose that over the next year inflation inFrance is expected to be 2% while in the US the forecast isfor 6% inflation. What exchange rate do you expect a year fromtoday?  

Answer & Explanation Solved by verified expert
4.4 Ratings (825 Votes)
A Price of basket of good in Paris 133 Euros Price of basket of goods in New York 153 We know that according to absolute purchasing power parity price of basket goods should be same in two different countries    See Answer
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