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In the real world where relative PPP fails to hold, suppose that U.S. inflation is expected to exceed European inflation by 6 percent for the
In the real world where relative PPP fails to hold, suppose that U.S. inflation is expected to exceed European inflation by 6 percent for the foreseeable future. Furthermore, suppose that output demand and supply trends are widely expected to cause the dollar to decline against the euro in real terms at a rate of 2 percent per year. Find the international interest rate difference.
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