The Mexican economy is predicted to average double-digit inflation over the next two years at 10 percent per year. The inflation forecast for the United States for the same period is 4 percent per year. If the current exchange rate is $0.091/peso, what is the expected exchange rate two years from now?

Question

Quizplus · Accepted Answer

The expected exchange rate can be calculated using the formula for relative purchasing power parity: E(S2) = S0 * [(1 + i_mexico)^2 / (1 + i_us)^2]. Plugging in the values: E(S2) = 0.091 * [(1 + 0.10)^2 / (1 + 0.04)^2] = 0.08134/peso.

The Mexican Economy Is Predicted to Average Double-Digit Inflation Over