You are given the following information. The current dollar/euro exchange rate is 1.25 dollars per euro. A U. S. basket that costs $100 would cost 64 euro in the euro area. For the next year, the Fed is predicted to keep U. S. inflation at 3% and the ECB is predicted to keep euro area inflation at 1%. The speed of convergence to absolute PPP is 15% per year. a. What is the current U. S. real exchange rate, with the euro area?
b. How much is the dollar overvalued/undervalued?
c. What do you predict the U. S. real exchange rate with the euro will be a year from now?
d. What is the expected rate of real depreciation for the United States (versus the euro)?
e. What is the expected U. S. minus euro area inflation differential for the coming year?
f. What is the expected rate of nominal depreciation for the United States (versus the euro)?