The spot exchange rate of British pound(£)is $1.6000/£.The annual inflation rate in US$ is 4% and 8% in the United Kingdom.What will be the anticipated exchange rate at the end of the year if PPP is valid?

Question

Quizplus · Accepted Answer

According to PPP, the anticipated exchange rate after one year should equal the current exchange rate multiplied by the ratio of the two countries' inflation rates as follows:

End of year exchange rate = Current exchange rate × (1 + inflation rate of UK) ÷ (1 + inflation rate of US)
End of year exchange rate = $1.6000 × (1+0.08) ÷ (1+0.04) = $1.5407/£

Therefore, the best choice is A ($1.5407/£).

The Spot Exchange Rate of British Pound(£)is $1