Look at Figure 1 in the box The 1992 EMS Crisis. European nominal exchange rates had been

Question:

Look at Figure 1 in the box "The 1992 EMS Crisis."

European nominal exchange rates had been fixed between the major currencies from roughly 1979 to 1992.

a. Explain how to read the vertical axis of Figure 1. What country experienced the largest depreciation? What country clearly experienced the smallest depreciation?

b. If two-year nominal interest rates in France and Italy had been similar in January 1992, which country would have generated the highest return on a two-year bond?

c. If the changes in the nominal exchange rates returned countries to medium-run equilibrium, which countries had the largest overvaluations in 1992?

Data from Figure 1