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6.Assume that the current dollar-Euro exchange rate (E $/ ) is equal to 1, the real exchange rate (q us/Eur ) = 1.26, the price

6.Assume that the current dollar-Euro exchange rate (E_$/) is equal to 1, the real exchange rate (q_us/Eur) = 1.26, the price level equals 2 in the U.S. and 2.5 in Europe.Assume thatrelative PPP holds.

a.If inflation is 5% in the U.S. but 2% in Europe, what will be the price levels in the U.S. and Europe a year from now?

b.What will be the nominal exchange rate (E_$/) a year from now?

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

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