Question: Suppose that the current exchange rate between the dollar and the euro is $1.30 = $1 (i.e., ep=$1.30) and the price per apple in the

Suppose that the current exchange rate between the dollar and the euro is $1.30 = $1 (i.e., ep=$1.30) and the price per apple in the Euro zone is $1. Assume that the inflation rate is expected to be 8 percent in the U.S. and 10 percent in the euro zone for the coming year. Assume that these inflation rates will be the only factors that affect the exchange rate between the dollar and the euro over the year. Further assume that there is no transaction cost.

If at the end of the year, you have $5, how many apples can you buy in the Euro zone?

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