Consider the following 1995 and 2005 data for the prices of the Canadian dollar (measured in the currencies of seven foreign countries, identified by an asterisk *), as well as for the Consumer Price Indexes (calibrated such that 100 = 2000 prices). Assume that the Consumer Price Indexes for Canada and for the seven foreign countries are the values for P and P* used to measure the real exchange rate, er = eP/P*. Note that these data represent the French and Irish currencies in 1995 as if they were Euros.

a) Calculate the average annual inflation rate in Canada over the decade. For the first four years of that decade (i.e., from 1995 to 1999) the average annual inflation rate was 1.47 per cent. Calculate the average annual inflation rate over the last six years (i.e., from 2000 to 2005).

b) Calculate the average annual inflation rate in Japan over the decade. The average annual inflation rate for the first five years (i.e., from 1995 to 2000) was .30 per cent. Calculate the average annual inflation rate over the last five years (i.e., from 2001 to 2005).

c) Calculate the average annual inflation rate of in Turkey over the decade. The average annual inflation rate over the first seven years (i.e., from 1995 to 2002) was 66.53 per cent. Calculate the average annual inflation rate over the last three years (i.e., from 2003 to 2005).

d) For 2005, calculate the following: the price of Euros in units of Japanese yen; the price of Japanese yen in units of Mexican pesos; the price of Mexican pesos in units of British pounds; and the price of British pounds in units of Euros.

e) For both 1995 and 2005, calculate the real exchange rate between Canada and each of the seven other countries (i.e., the price of Canadian products to foreigners, relative to the price of their own products). For which countries have the prices of Canadian products risen? For which have they fallen? Do these data support the idea of relative purchasing power parity?

Country 1995 2005 price of Canadian price of Canadian dollar, e CPI CPI dollar, e 1.0000 5544 Canada France Ireland Japan Mexico Turkey* United Kingdom* United States* 68.5346 4.6774 0334 4617 7286 91.8 94.2 88.1 98.5 41.7 6.3 87.6 88.5 6141 6141 90.9570 8.9934 1.1088 4539 8252 112.2 109.9 118.9 97.8 127.2 341.6 112.8 113.4