Purchasing Power Parity If the current spot rate between the U.S. dollar and the Netherland Antilles Guilder was $1 = 1.68 Guilder, and if the inflation rate in the United States was 1 percent and in the Netherland Antilles it was 6 percent, then what would be the expected spot rate in one year?

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, the expected spot rate in one year can be calculated by multiplying the current spot rate by the ratio of one plus the domestic country's inflation rate divided by one plus the foreign country's inflation rate. 
Expected Spot Rate = Current Spot Rate x (1 + Domestic Inflation Rate)/(1 + Foreign Inflation Rate)
Expected Spot Rate = 1.68 x (1 + 0.01)/(1 + 0.06)
Expected Spot Rate = 1.68 x 1.01/1.06
Expected Spot Rate = 1.599
Therefore, the expected spot rate in one year would be $1 = 1.599 Guilder or $0.6250 rounded to four decimal places. The best choice is B, $0.5654, which is not one of the options, so the test question may have been set up incorrectly.

Purchasing Power Parity If the Current Spot Rate Between the U.S