Your family is planning a ski vacation to Mt. Blanc in Chamonix, France, one year from now. Your family is based in the U.S. and your home currency is the US dollar. Since this is a foreign currency expenditure, your parents have entrusted the budgeting in your expert hands. The chateau's owner wishes to preserve his real income against both inflation and exchange rate changes. So, the present monthly rent of 10,000 will be adjusted upwards or downwards for any change in the French cost of living between now and then. You are basing your budgeting on purchasing power parity (PPP). French inflation is expected to average at 3.5000% for the coming year, while the inflation in the U.S. is expected to be at 2.5000%. The current spot rate is $1.1840/.

1. How many dollars will you need for your family's month-long vacation if your family were departing now? (1 point)

2. What is the expected exchange rate between the dollar and the euro one year hence? (2 points)

3. How many euros you will need one year hence for your month-long vacation? (2 points)

4. What will be the cost of your vacation in US dollars as per the estimated exchange rate next year? (2 points)

5. By what percent will the dollar cost go up between now and next year? Show with calculation. (2 points)

6. Why will your dollar cost go up? (1 point)