If expected inflation during the next year in the U.S. and Australia are 3% and 5%,...

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If expected inflation during the next year in the U.S. and Australia are 3% and 5%,...

If expected inflation during the next year in the U.S. and Australia are 3% and 5%, respectively, and if the current spot exchange rate is AUD 1.9419 / USD, then in order for relative PPP to hold, the spot rate expected in 1-year should be __________.

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Answer 1

Answer #1

in the given direct quote:

USD is foreign currency and AUD is home currency.

As per PPP,

forward rate in one year =spot rate *(1+inflation rate in home) / (1 + inflation in foreign country)

=>1.9419 *(1.05) / (1.03)

=>1.9796.

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Answer 2

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