The Peruvian economy is predicted to average double digit inflation over the next three years of 40% per annum. The forecast for the U.S. is 3% per annum. If the current exchange rate is $.2777/Sol, how much will a Sol cost you in three years?

Question

Quizplus · Accepted Answer

To find the future exchange rate, adjust the current rate by the inflation differential. The Peruvian Sol is expected to devalue due to higher inflation compared to the U.S. dollar. The formula to adjust the exchange rate is: Future Exchange Rate = Current Exchange Rate * (1 + Foreign Inflation Rate) / (1 + Domestic Inflation Rate) raised to the power of the number of years. Using the given rates: $.2777 * (1 + 0.40) / (1 + 0.03) raised to the power of 3 = $.1016.

The Peruvian Economy Is Predicted to Average Double Digit Inflation