P19-1

Exchange rate movements Suppose a basket of goods in Paris costs 133 and the same basket purchased in New York costs $153.

1. At what exchange rate between euros and dollars is the cost of the basket of goods the same in each city?

2. Now suppose that over the next year inflation in France is expected to be 2% while in the U.S. the forecast is for 6% inflation. What exchange rate do you expect a year from today?