On January 1,1985,the annual inflation rates in the U.S.and France were expected to be 4% and 6%,respectively.If the current spot rate that day was $.1250,then the expected spot rate in two years was

Question

Quizplus · Accepted Answer

Using the Relative Purchasing Power Parity (RPPP) formula, we have:
(1 + infl US)/(1 + infl France) = (Expected Spot Rate in 2 years)/(Current Spot Rate)
(1 + 0.04)/(1 + 0.06) = x/0.1250
x = 0.1203
Therefore, the expected spot rate in two years is $.1203, which corresponds to choice C.

On January 1,1985,the Annual Inflation Rates in the U