1. If the nominal exchange rate in dollars per euro increases while the PPP based exchange rate declines we can conclude that:

A.) the real exchange rate (dollars per euro) has increased.

B.) the real exchange rate (dollars per euro) has decreased.

2. If the real exchange rate remains constant over time we can conclude that:

A.) Relative PPP holds

B.) Nominal exchange rate remains constant.

3. ArtTech exports a specialized machine part to Japan. The price set in Japan is 120,000 and the cost incurred in the US is $800. The current exchange rate is 120 per dollar. Over a year the inflation rate in US is 2% and the inflation rate in Japan is 1%. The price in Japan increases with the local inflation rate and the cost in the US increases by the US inflation rate. What will be the percentage change in the profit per unit one year later if the exchange rate did not change? [First compute the profit before and after the price/cost changes due to inflation.]

A. -1%

B. -2%

C. -3%