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How to deal with this question? Question (d) . the spot exchange rate today: AU$3.00 per El, . the price in Australia: $200, . the

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Question (d)

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. the spot exchange rate today: AU$3.00 per El, . the price in Australia: $200, . the price in Germany: E100, . the (expected) annual inflation rate in Australia: It's = 0.00% (every year), . the (expected) annual inflation rate in Germany: The = 0.00% (every year), and . the one-year nominal interest rate on bank deposits in Germany: ie =10.00%. (a) Calculate the real exchange rate, qs/6, (Australia against Germany). (1 mark) (b) By how much (in %) is the dollar under/over-valued against Euro? (2 marks) (c) According to the purchasing power parity, what should be the nominal exchange rate (Australian dollars per euro) in the long run, E*s/e? (1 mark) (d) Based on the speed of convergence toward the purchasing power parity of 15%, calculate: (i) the expected real depreciation rate of Australia against Germany in 1 year, %Aqsie, and (ii) the expected depreciation rate of Australian dollars against euros in 1 year, %AEes/e. (4 marks)

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