Currently,you can exchange $1 for SF 1.14.Assume that the average inflation rate in the U.S.over the next two years will be 2.5 percent annually as compared to 3 percent in Switzerland.Based on this information and relative purchasing power parity,which one of the following assumptions can you make regarding the next two years?

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Quizplus · Accepted Answer

According to the relative purchasing power parity, the exchange rate between two currencies should adjust in accordance with the difference in inflation rates between the two countries. As the inflation rate is higher in Switzerland as compared to the US, the Swiss franc will depreciate in value relative to the US dollar. Therefore, the assumption that can be made is that the US dollar will appreciate against the Swiss franc.

Currently,you Can Exchange $1 for SF 1