SEND YOUR ANSWERS IN EXCEL.

PPP. This is monthly data on the exchange rate of the US/UK, US inflation and UK inflation from December 2003 to December 2004. Form one column with the exchange rate growth and another with the inflation differential (US Inflation UK Inflation) and do a scatter plot with inflation differential on the vertical axis and exchange rate growth on the horizontal.

Based on a visual analysis of the chart, do you think that PPP holds? Explain your reasoning.

XR 2003-12-01 2004-01-01 2004-02-01 2004-03-01 2004-04-01 2004-05-01 2004-06-01 2004-07-01 2004-08-01 2004-09-01 2004-10-01 2004-11-01 2004-12-01 1.7516 1.8255 1.8673 1.8261 1.8031 1.7860 1.8279 1.8438 Inflation US 78.2644 78.6020 78.7707 78.9395 79.0661 79.4036 79.6989 79.7833 79.8255 Inflation UK 77.3000 77.0000 77.2000 77.3000 77.6000 77.9000 77.9000 77.7000 77.9000 77.9000 78.1000 78.3000 78.6000 1.7937 1.8077 1.8607 1.9286 80.5006 80.8803 80.8803 XR 2003-12-01 2004-01-01 2004-02-01 2004-03-01 2004-04-01 2004-05-01 2004-06-01 2004-07-01 2004-08-01 2004-09-01 2004-10-01 2004-11-01 2004-12-01 1.7516 1.8255 1.8673 1.8261 1.8031 1.7860 1.8279 1.8438 Inflation US 78.2644 78.6020 78.7707 78.9395 79.0661 79.4036 79.6989 79.7833 79.8255 Inflation UK 77.3000 77.0000 77.2000 77.3000 77.6000 77.9000 77.9000 77.7000 77.9000 77.9000 78.1000 78.3000 78.6000 1.7937 1.8077 1.8607 1.9286 80.5006 80.8803 80.8803