6. Assume that the current dollar-Euro exchange rate (E_$/) is equal to 1.05, the real exchange rate (q_us/Eur) = 1.26, the price level equals 1 in the U.S. and 1.2 in Europe. Assume that relative PPP holds.

a. If inflation is 4% in the U.S. but 1% in Europe, what will be the price levels in the U.S. and Europe a year from now?

b. Given your answer to part a, what will be the nominal exchange rate (E_$/) a year from now?

c. What will the real exchange rate be a year from now?