Question: After Class: Practice Problem 8 Suppose we are in a world in which PPP holds perfectly a) The standard consumption basket price is 1,000 EUR

After Class: Practice Problem 8 Suppose we are in a world in which PPP holds perfectly a) The "standard consumption basket" price is 1,000 EUR in France and 65,000 JPY in Japan. According to PPP, what is the exchange rate between the euro and the JPY, S(JPY/EUR)? b) Suppose annual inflation is 0% in Japan and 3% in France i. Do you expect the euro to appreciate or depreciate relative to the Yen? ii. By how much do you expect the value of the euro to change? Obtain your answer in two ways: (1) based on the simplified formula that uses the difference in inflation; (2) based on the PPP formula using the price of the standard consumption basket

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