Suppose the Swiss franc is worth $0.99 at the beginning of the year. During the year,U.S. inflation is 5% and Swiss inflation is 3%.

(a) Does PPP predict an appreciation or a depreciation of the Swiss franc over theyear? Why? By how much approximately?

(b) Suppose the Swiss franc is worth $1.03 at the end of the year.i. By how much did the value of the Swiss franc change relative to the U.S. dollarover the year?ii. Does your answer confirm or disprove the prediction of PPP in question a)?iii. Does your answer change if you use PPP in its exact form? Why?

One year ago, the spot exchange rate between country F and country J was S0=F/J155.Today, the spot rate is S1=F/J160. Inflation over the year was 2% in country J and 3%in country F.

(a) What is the percentage change in the value of currency J relative to currency Fover the year?

(b) One year ago, what FJexchange rate would PPP have predicted for today?

(c) Was currency J overvalued or undervalued against currency F over the period? Byhow much?