assume the following: current exchange rate $1.40/pound inflation rate/year in the us 4% inflation rate/year in...

Question

Question

assume the following:

current exchange rate $1.40/pound

inflation rate/year in the us 4%

inflation rate/year in england 7%

if ppp holds what would you expect the exchange rate to be in 7 years?

business finance

Answer 1

Answer #1

Expected Exchange Rate = Current Exchange Rate * [(1 + Inflation_{Price currency}) / (1 + Inflation_{Base
currency})]ⁿ

Expected Exchange Rate in 7 years = $1.40/Pound * [(1 + 0.04) / (1 + 0.07)]⁷

= $1.40/Pound * [0.9720]⁷

= $1.40/Pound * 0.8195

= $1.1473/Pound, or $1.15/Pound

Answer 2

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