Assume the current spot rate between the UK and the U.S.is £.6379 per $1,the expected inflation rate in the U.S.is 1.9 percent,and the expected inflation rate in the UK is 2.8 percent.If relative purchasing power parity exists,what will the exchange rate be next year?

Question

Quizplus · Accepted Answer

The correct answer is B because the expected exchange rate next year is £.6436/$1. This is calculated using the formula: Expected exchange rate = Current spot rate * (1 + Expected inflation rate in the foreign country) / (1 + Expected inflation rate in the domestic country). In this case, the current spot rate is £.6379/$1, the expected inflation rate in the U.S. is 1.9 percent, and the expected inflation rate in the UK is 2.8 percent. Plugging these values into the formula, we get: Expected exchange rate = £.6379/$1 * (1 + 0.019) / (1 + 0.028) = £.6436/$1.

Assume the Current Spot Rate Between the UK and the U.S.is