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5. PURCHASING POWER PARITY : Consider the following information: USA Europe Initial Inflation (i=0) 0% 0% Final Inflation (i=+1) 2% 7% Initial Exchange rate of

5. PURCHASING POWER PARITY:

Consider the following information:

USA Europe

Initial Inflation (i=0) 0% 0%

Final Inflation (i=+1) 2% 7%

Initial Exchange rate of the Euro (i=0) $1.2225/Euro

Final Exchange rate of the Euro (i=+1) $1.3150/Euro

Is there purchasing power parity? Why or why not? From the perspective of the US firm, where would it be cheaper to buy the goods?

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