1. Suppose at the beginning of the year, a textbook sells for €60 in Paris, France, and $60 in New York City, and PPP holds. Over the year, there is an inflation rate of 10 percent in France and no inflation in the United States. What exchange rate would maintain PPP at the end of the year?
2. Suppose that economic growth in Mexico suddenly slows, all other things held constant. According to the monetary approach to exchange rates model, what should happen to the dollar price of the Mexican peso? Why does the model make this prediction?
3. Suppose that domestic money demand is falling at 2 percent per year while the money supply is rising at 6percent per year. What is happening to the domestic price level? Explain.