Consider two French firms listed on the Paris stock market:
• Mega manufactures engine parts in France for export, and the prices are set and paid in dollars. Production costs are mostly domestic (the labor force) and considered to follow the French inflation rate.
• Club imports computers from the United States and sells them in France to compete with French products.
a. What will happen to the earnings of the two companies in the short run if there is a sudden depreciation of the euro (say, 20 percent)?
b. What is the difference between the short-run effect and the long-run adjustments?
c. Would your Findings be the same if the euro depreciation were only a progressive adjustment to the United States-Europe inflation differential that reflected the higher European inflation rate?