Question: Between 2008 and 2017, the $ e exchange rate moved from $/e 1.48 to $/e 1.20. During this same period, the consumer price index (CPI)

Between 2008 and 2017, the $ e exchange rate moved from $/e 1.48 to $/e 1.20. During this same period, the consumer price index (CPI) in the Euro Area rose from 89.81 to 102.31 and the U.S. CPI rose from 202.42 to 246.67.

(a) Did PPP hold over the period? Could investors profit from arbitrage in the goods market?

(b) If PPP had held over this period, what would the $ e exchange rate have been in 2017?

c) Was the U.S. dollar overvalued or undervalued against the euro over the period? By how much?

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