Q1. Derive the Lira-German mark exchange rate as a cross rate using the Lira-U.S. dollar and mark-U.S. dollar exchange rates.

Q2. In Fall 1992, the value of the Lira's declined precipitously against the mark and even more so the dollar. From August 1992 to the February 1993 the declines were 22% and 34% respectively. Based on your calculations in (2) were these declines moves towards or away from equilibrium? Explain.

Q3. Assume that the Italian Lira was at its purchasing power parity value and hence in equilibrium relative to both the US dollar and the German mark in 1973. Compute PPP values of the Lira against both currencies for the remaining years of the sample.

Q4. From 1999 on, the Lira has been part of the Euro bloc. It is, however, possible to compute synthetic Lira/$ and DM/$ rates using Euro/$ rates and the conversion rates for the Euro countries' currencies. I have done this. The resultant figures are shown in the table for the years 1999-2003. Comment on their relation relative to PPP over this period.