) The central bank of Lithuania maintains an exchange rate band relative to the euro. This is aprerequisite for joining the Eurozone.

) The central bank of Lithuania maintains an exchange rate band relative to the euro. This is aprerequisite for joining the Eurozone. Lithuania must keep its exchange rate within 15% ofthe central parity of 3.4528 litas per euro. (i) Compute the exchange rate valuescorresponding to the upper and lower edges of this band. (ii) Suppose PPP holds. If Eurozoneinflation is currently 2% per year and inflation in Lithuania is 5%, compute the rate ofdepreciation of the lita. (iii) Will Lithuania be able to maintain the band requirement? Forhow long? (iv) Is an exchange rate band a necessary or sufficient condition for theattainment of this objective? (15 marks)

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