Suppose the current spot rate between a foreign country and Canada is Fc54.2 per $1. Expected inflation in the foreign country is 57% and expected inflation in Canada is 4%. If relative PPP holds, what is the expected %age change in the exchange rate over the next year?

Question

Quizplus · Accepted Answer

The expected percentage change in the exchange rate is equal to the difference between the expected inflation rates in the two countries. In this case, the expected inflation rate in the foreign country is 57% and the expected inflation rate in Canada is 4%, so the expected percentage change in the exchange rate is 57% - 4% = 53%.

Suppose the Current Spot Rate Between a Foreign Country and Canada