Hi,
Please clarify why the expected exchange rate in 1 year = current spot rate x (.99) in the answer to this question:
If the relative form of the PPP holds, the expected exchange rate in one year is closest to:
A) $1.3378 per €.
B) $0.7463 per €.
C) $1.3647 per €.
ANSWER:
A) $1.3378 per €.
Since inflation in Europe is higher than the inflation in the U.S. by 1%, the Euro is expected to depreciate by 1% annually against the dollar.
The current spot rate is $(1/0.74) per Euro or $1.3513/€
Expected exchange rate in 1 year = 1.3513(0.99) = $1.3378/€ (LOS 11.e)
Question ID: 981298