Assume that the inflation rate in Barbados is 3.20%,while the inflation rate in the U.S.is 3.00%.According to PPP,the Barbados dollar (BBD)should ___________ by _________%.

Question

Quizplus · Accepted Answer

According to PPP, the currency with the higher inflation rate (in this case, Barbados) should depreciate relative to the currency with the lower inflation rate (U.S.). Therefore, the Barbados dollar (BBD) should depreciate. The formula for calculating the expected exchange rate based on PPP is: 
Expected Exchange Rate = current exchange rate * (1 + inflation rate of home country) / (1 + inflation rate of foreign country)
Plugging in the numbers, we get:
Expected Exchange Rate = 1 * (1 + 0.032) / (1 + 0.03) = 1.001938
So, the Barbados dollar should depreciate by 0.1938%.

Assume That the Inflation Rate in Barbados Is 3