The spot exchange rate of British Pound($\le$) is $2.56(Canadian)/$\le$.The annual inflation rate in Canadian $is 4% and 8% in Britain.What will be the anticipated exchange rate at the end of the year if PPP is valid?
A)$2.4652/$\le$
B)$2.1503/$\le$
C)$3.0804/$\le$
D)$2.5600/$\le$ E(exchange rate) = spot rate x

Question

Quizplus · Accepted Answer

According to the purchasing power parity (PPP) theory, the exchange rate should adjust based on the relative prices of goods and services in different countries. In this case, we need to calculate the expected exchange rate using the inflation rates:

Expected exchange rate = Spot exchange rate x (1 + Canadian inflation rate)/(1 + British inflation rate)
Expected exchange rate = $2.56 x (1 + 0.04)/(1 + 0.08)
Expected exchange rate = $2.4652

Therefore, the answer is A.

The Spot Exchange Rate of British Pound ≤\le≤ ) Is $256(Canadian) ≤\le≤

The Spot Exchange Rate of British Pound $\le$ ) Is $256(Canadian) $\le$