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2) Suppose the cost of basket is P. = 300 euros in the Eurozone and PTurkey =800 liras in Turkey. Suppose the home country is

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2) Suppose the cost of basket is P. = 300 euros in the Eurozone and PTurkey =800 liras in Turkey. Suppose the home country is Turkey, and the exchange rate is 1.8 liras per euro. (10p) a) Write the absolute purchasing power parity (PPP) equation. Check to see whether PPP holds for the lira-euro exchange rate. b) Calculate the real exchange rate. Determine whether lira is over-valued, under-valued or neither. c) Write two reasons for why the tendency for PPP to hold is weak in the short-run

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