Suppose that the current spot exchange rate of U.S.dollars for Russian rubles is $0.15/1ruble.The price of Russian-produced goods increases by 8 percent, and the U.S.price index increases by 3 percent. According to PPP, the new exchange rate of Russian rubles to U.S.dollars is
A)0.15.
B)0.1425.
C)0.141.
D)0.1605.
E)0.159.

Question

Quizplus · Accepted Answer

PPP suggests that the percentage change in the exchange rate between two currencies should be equal to the difference in their inflation rates. Using PPP, we can calculate the expected new exchange rate as follows: 
New exchange rate = current exchange rate * (1 + Russian inflation) / (1 + US inflation)
New exchange rate = 0.15 * (1 + 0.08) / (1 + 0.03) = 0.1425
Therefore, the new exchange rate of Russian rubles to U.S. dollars is $0.1425/1 ruble, which corresponds to choice B.

Suppose That the Current Spot Exchange Rate of U