Annual inflation rates in the U.S. and Greece are expected to be 3% and 8%, respectively. If the current spot rate for the drachma is $.007, then the expected spot rate in three years is

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Quizplus · Accepted Answer

The expected spot rate can be calculated using the formula for purchasing power parity: Expected Spot Rate = Current Spot Rate * (1 + Inflation Rate of Domestic Country) / (1 + Inflation Rate of Foreign Country). Plugging in the values: Expected Spot Rate = $.007 * (1 + 0.03)^3 / (1 + 0.08)^3 = $.00607.

Annual Inflation Rates in the U