(c) (6 points) Suppose that in January 2020 the price of the same pecorino cheese in the US was 35 USD per kilo. Conside

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C 6 Points Suppose That In January 2020 The Price Of The Same Pecorino Cheese In The Us Was 35 Usd Per Kilo Conside 1 (335.72 KiB) Viewed 42 times

(c) (6 points) Suppose that in January 2020 the price of the same pecorino cheese in the US was 35 USD per kilo. Considering the price of Italian pecorino cheese in 2020 you calculated to include the 15% overall inflation, would you say that the law of one price held at that date? (ignore transportation costs or any other trade barriers) Explain how a possible mismatch in prices of the Italian pecorino cheese in the two countries at the given exchange rate in 2020 could be exploited up until the law of one price held. 3 (d) (3 points) From January 2018 to January 2020, what overall inflation in the US would have matched the Relative Purchasing Power Parity condition? (e) (6 points) The exchange rate in January 2019 was 0.87573 EUR/USD. In January 2019, suppose that a deposit in US dollars gave a nominal annual return of 5% , while a deposit in Euros gave a nominal annual return of 6%. If a European investor saw in a crystal ball the actual nominal exchange rate for January 2020, would she have preferred to invest in dollar deposits or euro deposits as of January 2019? Explain.