7. Suppose that the current exchange rate between the U.S. dollar and the Britis

Question

7. Suppose that the current exchange rate between the U.S. dollar and the British pound is 1.464$/£. Now further assume that the expected inflation rate in the U.S. for the next year is 2.5% while the expected inflation rate in England is 3%. Considering relative purchasing power parity (PPP), what 1-year forward rate would we expect in terms of $/£? To solve this problem, use the equation from the Suranovic textbook equation for relative PPP in section 30-4. Show your work to receive full credit for this problem.

Explanation / Answer

Here in question we have exchange ratein terms od $/£

1£ = 1.464$ as given in question

noe we add rate of inflation in both value

1£+3% of 1= 1.464$+2.5%of 1.464

1.03£ = 1.5006$

exchange value =1.5006$/1.03£

=1.4569$/£

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.