The current spot rate between the Canadian dollar and the Euro is C$1.6000/euro.The Canadian and European inflation rates are expected to be 2% and 4% per year for the next 10 years respectively.Using purchasing power parity to predict the exchange rate in 10 years,the predicted exchange rate is:

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) suggests that the exchange rate should change to reflect changes in inflation rates between two countries. 
Using PPP, the predicted exchange rate in 10 years can be calculated as follows: 
(C$1.6000/euro) * [(1+0.02)^10 / (1+0.04)^10] 
= C$1.3176/euro 
Therefore, the best choice is A, C$1.3176/euro.

The Current Spot Rate Between the Canadian Dollar and the Euro