The spot rate for the Argentine peso is $0.3600 per peso. Over the year inflation in Argentina is 10% and U.S. inflation is 4%. If purchasing power parity holds, at year-end the exchange rate should be approximately ______________ dollars per Real.

Question

Quizplus · Accepted Answer

Using the PPP formula [(1+Iₐ)/(1+Iₙ)] x S₀, where Iₐ is the inflation rate in Argentina, Iₙ is the inflation rate in the U.S., and S₀ is the spot exchange rate, we get [(1+0.10)/(1+0.04)] x 0.3600 = 0.4050. However, this is the expected exchange rate at year-end, and we are asked for the approximate exchange rate. To get an approximate exchange rate, we can use the formula: expected exchange rate x (1 + foreign inflation rate) / (1 + domestic inflation rate). Plugging in the numbers, we get 0.4050 x (1 + 0.10) / (1 + 0.04) = 0.3384, which is closest to option D.

The Spot Rate for the Argentine Peso Is $0