We can write any ________ as a function of the difference between the expected inflation rates of two countries and the current or spot exchange rate.

Question

Quizplus · Accepted Answer

The anticipated forward exchange rate can be written as a function of the difference between the expected inflation rates of two countries and the current or spot exchange rate. This is based on the concept of purchasing power parity (PPP), which states that the exchange rate should adjust to equalize the prices of identical goods and services in different countries. Thus, the anticipated forward exchange rate takes into account expected changes in inflation and exchange rates, making it a more accurate measure of future exchange rates compared to the known or unanticipated rates.

We Can Write Any ________ as a Function of the Difference