Suppose that a basket of consumer goods has values and in currencies and , so that .

Question:

Suppose that a basket of consumer goods has values and in currencies and , so that .

Expected inflation is percent and percent over the foreseeable future.

a. What are the expected price levels and and the expected nominal exchange rate in one period?

b. What is the expected real exchange rate in one period using time zero as a base?

c. What are the expected price levels in each country and the expected real exchange rat in two years?

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