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Let P be price index, I be inflation rate, and er be % change in the value of the foreign currency relative to the dollar.

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Let P be price index, I be inflation rate, and er be % change in the value of the foreign currency relative to the dollar. A formal statement of the relative version of PPP for the dollar/euro exchange rate is: = O P(1 + 1) = P$(1 + I$)(1 + ef) O P$(1 + $) = P(1 + 1)/(1 + ef) O 1 + ef = (1 + 1)/(1 + I$) O 1 + ef = (1 + 1$) / (1 + 1) QUESTION 15 1 points Assume that as of today, the spot exchange rate is 1.00 = $1.15 and the rates of inflation expected to prevail for the next year in the U.S. is 4 percent and 2 percent in the euro zone. What is the one-year forward rate that should prevail? O 1.1270 O 1.1279 O 1.1725 O 1.2199

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