Suppose P0D = 100, P0F = 1, and S0D/F = D100/F. Inflation in countries D and F are expected to be pD = 10 percent and pF = 21 percent over the foreseeable future.
a. What are the expected price levels E[P1F] and E[P1D] and the expected nominal exchange rate E[S1D/F] in one period?
b. What is the expected real exchange rate X1D/F in one period using time zero as a base?
c. Looking two years into the future, what are the expected price levels in each country (E[P2F] and E[P2D]) and the expected real exchange rate E[X2D/F]?