The current spot rate between Germany and the U.S. is Euro 1.27 per $1. Expected inflation in Germany is 9% per year and expected inflation in the U.S. is 4% per year. If relative purchasing power parity holds, what is the expected exchange rate three years from now?
A) Euro 1.285 per $1
B) Euro 1.388 per $1
C) Euro 1.470 per $1
D) Euro 1.572 per $1
E) Euro 2.179 per $1
Correct Answer:
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