Question

1. At the start of the year, the exchange rate was $1.29/€. At the end of the year, the exchange rate is $1.26/€. If U.S. inflation was 5% and European inflation was 9%, what has been the nominal and real change in the value of the Euro (versus the USD)?

Given your answer to Q1, what has happened to European export industry competitiveness over the year?

Answer 1

page: 01 Answer Qu) Geording to the given information We have to calculate nominal and real change in the value of the Euro At the start of year, I Ewro = $1.29 At the end of year, I Ewro =41.26 Therefore Ewio has appreciated in nominal terms le appreciation in nominal terms - Value at the end of year value at the beginning of year 1.26 , = T. 99 = 0.976744-1 = -0.023255 - -2.395 As per purchasing power posity cursiency with lower inflation rate appoccates

page: 02 interest rate in Europe = 9010 interest rate in US : 5506 l appreciation in Ewrope . lit inflation in us) Ĉit inflation in Ewropes (1+5•(•). (1+9.1.) 1.05 -1 1.09 1 = 0.96330 - 1 = -0,03669 =F3, 66946] Therefore, appređation in real terms. (1+(-2.3254)) (141-3.669./)) 0, 97675 0.96331 1.013951-1 = 0.013951 1. 395040)