Suppose that the current spot exchange rate of U.S. dollars for Russian rubles is $0.15/1ruble. The price of Russian-produced goods increases by 8 percent, and the U.S. price index increases by 3 percent.
-According to PPP, the new exchange rate of Russian rubles to U.S. dollars is
A)0.15.
B)0.1425.
C)0.141.
D)0.1605.
E)0.159.

Question

Quizplus · Accepted Answer

According to PPP, the exchange rate should adjust to reflect the relative changes in price levels. The price of Russian goods increased by 8%, which means the ruble has depreciated relative to the dollar. The U.S. price index increased by 3%, which means the dollar has depreciated relative to the ruble. To find the new exchange rate, we can use the formula:

New exchange rate = Old exchange rate x (1 + relative change in foreign price level) ÷ (1 + relative change in domestic price level)

Plugging in the values, we get:

New exchange rate = 0.15 x (1 + 0.08) ÷ (1 + 0.03) = 0.1425

Therefore, the answer is B.

Suppose That the Current Spot Exchange Rate of U