One year ago, the spot exchange rate between country F and country J was S0=F/J 155.Today, the spot rate is S1=F/J 160. Inflation over the year was 2% in country J and 3%in country F.

a) Did currency J appreciate or depreciate over the year? By how much?

b) One year ago, what F/J exchange rate would PPP have predicted for today?

c) Was currency J overvalued or undervalued against currency F over the period? By how much?

d) Given your answers, could investors profit from arbitrage in the goods market over the year? Why?