1. Suppose the inflation rate in Japan in 1% and the inflation rate is Germany is 2.5%. By what rate should the euro depreciate against yen in order for the real exchange rate to remain constant?

A.) 3.5%

B.) 1.75%

C.) 1.5%

2. If the nominal exchange rate (dollars per pound) remains constant and the inflation in UK is greater than the inflation rate in the US we can conclude that:

A.) Pound experiences real appreciation against the dollar.

B.) Pound experiences real depreciation against the dollar.

3. If the market exchange rate remains constant while the PPP based exchange rate rises (for rates quoted as dollars per pound) the real exchange rate (dollars per pound) will:

A.) Increase

B.) Decrease