Suppose the current exchange rate for the Russian ruble is RUB 37.77. The expect

Question

Suppose the current exchange rate for the Russian ruble is RUB 37.77. The expected exchange rate in three years is RUB 34.51. Assume that the anticipated inflation rate is constant for both countries.(Enter your answer as directed, but do not round intermediate calculations.)

What is the difference in the annual inflation rates for the United States and Russia over this period?(Negative amount should be indicated by a minus sign. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Suppose the current exchange rate for the Russian ruble is RUB 37.77. The expected exchange rate in three years is RUB 34.51. Assume that the anticipated inflation rate is constant for both countries.(Enter your answer as directed, but do not round intermediate calculations.)

Explanation / Answer

Using the relative purchasing power parity equation:

ft = so*(1=(hpc-hus))t

we find

R34.57 = R37.71 (1=(hpc-hus))3

hpc-hus = (R34.57/r37.71)1/3-1

hpc-hus = -0.0286 or 2.86%

Inflation in Russia is expected to be less than that in US by -2.86% per year over this period.

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