Question $6$

The spot exchange rate between the dollar and the euro is $1\mathrm{.}18$ dollars

per euro $($USD$/$EUR$).$ The expected annual inflation rates are:

$5\%$ in the US

$3\%$ in the euro$-$area

What would be the forecast of the exchange rate USD$/$EUR in one year

based on relative PPP$?$

$1\mathrm{.}25$

$1\mathrm{.}12$

$1\mathrm{.}16$

$1\mathrm{.}20$