QUESTION 4

1. A eurozone citizen observes the spot rate between euros and pounds is currently 1.04/. Assume the expected inflation rates over the course of the year in the eurozone and the UK are 3% and 2%, respectively. Suppose the spot rates for euros and pounds at the end of the year are as follows:

   $1.15/, $1.11/

   Which of the following statements is true according to relative PPP?

   		The euro appreciated in real terms.
   		The pound appreciated in real terms.
   		Neither the euro nor the pound appreciated in real terms.
   		Cannot be determined.

QUESTION 6

1. Use the following information to answer the next two questions.

   Investors expect inflation rates over the next twelve months in the US and Japan to be 8% and 3%, respectively. The current exchange rates for the two currencies are as follows:

   C$.007/, C$1.02/$

   Suppose that twelve months from now, the exchange rate between US dollars and yen is $.0071/. According to relative PPP, what be theimpact of this new exchange rate on the US balance of trade? (Assume the US is the home country and ignore any possible feedback loop.)Round intermediate steps to four decimals.

   		The US BOT will increase.
   		The US BOT will decrease.
   		The US BOT will not be affected.
   		Cannot be determined.