Business, 11.03.2020 06:02 vrentadrienneoqug1a

The establishment of the Euro as a unit of account in 1999 meant that from then on the currencies of the participating countries traded at a fixed rate, until the Euro completely replaced these currencies in year 2002.

a) What would the inflation rates of these countries have to be in these transition years for RPPP to hold?

b) If the inflation of Italy was twice as high as that of Germany in one year between 1999 and 2002, what can we say about the Italian lira against the German mark? (Which currency became overvalued/undervalued?)

c) What does the concept of PPP tell us about what needs to happen for such a monetary agreement to work for a long period of time?

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