The U.S. inflation rate is expected to be 4 percent over the next year, while the European inflation rate is expected to be 3 percent. The current spot rate of the euro is $1.03. Using purchasing power parity, the expected spot rate at the end of one year is $____.
A) 1.02
B) 1.03
C) 1.04
D) none of the above

Question

Quizplus · Accepted Answer

SOLUTION: 
$\begin{array} { l } 
e _ { f } = \frac { 1.04 } { 1.03 } - 1 = .0097 \
E \left( S _ { t } + 1 \right) = \$ 1.03 ( 1.0097 ) = \$ 1.04
\end{array}$

The US Inflation Rate Is Expected to Be 4 Percent Over