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 the year 2002.
(a) How would the inflation rates of these countries have to had been in these transition years for PPP to hold?
(b)If the inflation of Italy was twice as high as that of Germany a year between 1999 and 2002,what can we say then about the Italian lira against the German mark?
(c)What does the concept of PPP thus tells us about what needs to happen for such this monetary agreement to work for a long period of time?

Question

Quizplus · Accepted Answer

The Answer of 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 the year 2002.
(a) How would the inflation rates of these countries have to had been in these transition years for PPP to hold?
(b)If the inflation of Italy was twice as high as that of Germany a year between 1999 and 2002,what can we say then about the Italian lira against the German mark?
(c)What does the concept of PPP thus tells us about what needs to happen for such this monetary agreement to work for a long period of time?

The Establishment of the Euro as a Unit of Account