What will be the price levels in the us and europe a year, Financial Management

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What will be the price levels in the us and europe a year

Assume that the current dollar-Euro exchange rate (E$/€) is equal to 1.05, the real exchange rate (qus/Eur) = 1.26, the price level equals 1 in the U.S. and 1.2 in Europe. Assume that relative PPP holds.

a. If inflation is 4% in the U.S. but 1% in Europe, what will be the price levels in the U.S. and Europe a year from now?

b. Given your answer to part a, what will be the nominal exchange rate (E$/€) a year from now?

c. What will the real exchange rate be a year from now?

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