Pro Corp, a U.S.-based MNC, uses purchasing power parity to forecast the value of the Thai baht (THB), which has a current exchange rate of $0.022. Inflation in the U.S. is expected to be 3% during the next year, while inflation in Thailand is expected to be 10%. Under this scenario, Pro Corp would forecast the value of the baht at the end of the year to be:
A) $0.023.
B) $0.021.
C) $0.020.
D) None of the above

Question

Quizplus · Accepted Answer

Using the purchasing power parity formula: forecasted exchange rate = current exchange rate × (1 + U.S. inflation rate) / (1 + foreign inflation rate). 
Plugging in the numbers: 
Forecasted exchange rate = $0.022 × (1 + 0.03) / (1 + 0.10) = $0.0198. 
Rounding this to the nearest cent, the answer is $0.021, which is choice B.