Consider a world with two countries, the United States and Europe. Prices are perfectly flexible and APPP holds at all times. The money supply at this moment in the United States is $1,000,000, real output in the United States is 1,000 baskets. The money supply at this moment in Europe is €500,000 and real output in Europe is 1,000 baskets. Nominal interest rates, and liquidity demand for money are the same in both countries.

i) What is the exchange rate in euros?

ii) Suppose Europe's output increases to 2,000 baskets and nominal interest rates stay the same. What effect does this have on Europe's price level?