Suppose inflation rates in the U.S. and France are expected to be 4% and 9%, respectively, next year and 6% and 7%, respectively, in the following year. If the current spot rate is $.1050, then the expected spot value of the franc in two years is

Question

Quizplus · Accepted Answer

To determine the expected spot value of the franc in two years, we need to use the relative purchasing power parity (PPP) formula:

(expected spot rate in two years) = (current spot rate) x (1 + French inflation rate / 1 + US inflation rate in year 1) x (1 + French inflation rate in year 2 / 1 + US inflation rate in year 2)

Plugging in the given numbers, we get:

(expected spot rate in two years) = $.1050 x (1 + 0.09 / 1 + 0.04) x (1 + 0.07 / 1 + 0.06) = $.1050 x 0.9412 x 1.0755 ≈ $0.0992

Therefore, the best choice is C.

Suppose Inflation Rates in the U