Canadian inﬂation is predicted to be 5% next year. The Barnes group tells you that inﬂation in England is expected to be 3%. The current exchange rate is £2.11 per $1. What is your best guess as
To next year's exchange rate?

Question

Quizplus · Accepted Answer

The exchange rate can be adjusted using the relative inflation rates. If Canadian inflation is higher than England's, the Canadian dollar is expected to depreciate. Using the formula: New exchange rate = Current rate * (1 + inflation rate of Canada) / (1 + inflation rate of England), we get £2.11 * (1.05/1.03) = £2.069 per $1.

Canadian Inﬂation Is Predicted to Be 5% Next Year