Currently,you can exchange €100 for A$132.66.The inflation rate in Europe is expected to be 3.1 per cent as compared to 3.6 per cent in Australia.Assuming that relative purchasing power parity exists,what should the exchange rate be 5 years from now?

Question

Quizplus · Accepted Answer

According to relative purchasing power parity, the exchange rate should adjust based on the inflation differential. The formula is: Future Exchange Rate = Current Exchange Rate * (1 + Inflation Rate of Domestic Country) / (1 + Inflation Rate of Foreign Country). Applying this: 132.66 * (1 + 0.031)^5 / (1 + 0.036)^5 = 0.7351.

Currently,you Can Exchange €100 for A$132