The spot exchange rate for the British pound is $1.60/£. The annual inflation rate in the U.S. is 4% compared to 8% in the U.K. What is the anticipated exchange rate at the end of the year if PPP is valid?

Name: The spot exchange rate for the British pound is $1.60/£. The annual inflation rate in the U.S. is 4% compared to 8% in the U.K. What is the anticipated exchange rate at the end of the year if PPP is valid?
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Question

Quizplus · Accepted Answer

Expected exchange rate = $1.60/₤ × 1.04/1.08 = $1.54/₤

The Spot Exchange Rate for the British Pound Is $1