10. If the annual percent changes of Pus, Peu, and q are 5%, 1%, and -0.5%,...

10. If the annual percent changes of Pus, Peu, and q are 5%, 1%, and -0.5%, respectively, then the theory of PPP predicts that the euro will _________ in nominal terms, while the real exchange rate approach predicts that _________ the euro will _______ nominal terms.

A) appreciate 4% against the dollar; appreciate 1.5% against the dollar

B) depreciate 3% against the dollar; appreciate 0.5% against the dollar

C) appreciate 4% against the dollar; 3.5% against the dollar

D) none of the above

Solutions

Expert Solution

Theory of PPP -

Taking log both sides and differentiating:

=> Euro appreciate 4% against the dollar

By real exchange rate approach:

Taking log both sides and differentiating we get:

=> Euro will appreciate 3.5% against the dollar.

Correct Ans - C

Rahul Sunny answered 1 year ago

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