I need help please, From the base price level of 100 in 1981, Saudi Arabian and...
I need help please, From the base price level of 100 in 1981, Saudi Arabian and U.S. price levels in 2010 stood at 310 and 100, respectively. Assume the 1981 $/riyal exchange rate was $0.70/riyal. Suggestion: Using the purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 0.70. What should the exchange rate be in 2010? I have continually done this over and over following current similar questions and haven't had the correct answer yet, pls help, I need to know how to work it for tests and I got 2.17
Homework Answers
Answer:
In 1981 $/Riyal = $0.70 / Riyal
From the base price level of 100 in 1981, Saudi Arabian and U.S. price levels in 2010 stood at 310 and 100,
Cumulative Inflation rate in US (from 1981 to 2010) = 0%
Cumulative Inflation rate in Saudi Arabia (from 1981 to 2010) = 200%
Hence:
Using PPP theory
Exchange rate in 2010 = $0.70 / Riyal * (1 + 0%) / (1 + 200%) = $0.2333 / Riyal
Exchange rate in 2010 = $0.2333 / Riyal
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