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Assume the exchange rate for the West German mark equaled 50.5225/DM on December 31, 1996 and equals 50.5450 on December 31, 1999. Also assume that
Assume the exchange rate for the West German mark equaled 50.5225/DM on December 31, 1996 and equals 50.5450 on December 31, 1999. Also assume that on December 31, 1996 purchasing power party held between the dollar and the mark. The following are the annual rates of inflation in the U.S. and Germany for years 1997, 1998 and 1999. inflation 1997 2.54 1998 2.04 1999 3.59 Using PPR, is the mark under or over valued on December 31, 1999. in your response. If you determine that the mark is under or over valued, calculate what the exchange rate should be on December 31, 1999, if ppp holds. (12 points)
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