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2. Suppose one euro was worth $1.05 at the beginning of the year and $1.15 at the end of the year. At the beginning of
2. Suppose one euro was worth $1.05 at the beginning of the year and $1.15 at the end of the year. At the beginning of the year, the CPIs (Consumer Price Index) for the U.S. and the Euro Area were both 100. At the end of the year, the CPI for the U.S. was 110 and the CPI for the Euro Area was 108. (a) [6 pts] Did the U.S. dollar appreciate or depreciate, in nominal terms, relative to euro over the year? By how much? (b) [8 pts) Did the relative purchasing power parity (PPP) hold over the year? If not, calculate the exchange rate at the end of the year that would have made PPP hold. (c) [7 pts] Was U.S. dollar overvalued or undervalued at the end of the year? Why? (d) [7 pts] What are the real exchanges at the beginning of the year and at the end of the year
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