1) Suppose that a laptop costs 1,000 dollars in the United States and 800 euros in the Eurozone. If absolute PPP holds, and Europe and the United States trade only laptops, what is the dollar-euro exchange rate?

2) Due to changes in demand, the price of a laptop in the United States increases to 1,200 dollars. If absolute PPP holds, what happens to the exchange rate?

3) Suppose that Europe and the United States trade a broad package of goods. The prices of these goods are measured by the consumer price index and the rate of inflation in the United States is persistently higher than in Europe. What happens to the exchange rate according to PPP theory?