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?