The base price level is 100 in 1987. In 1988, the price level at Germany and United States stands...
The base price level is 100 in 1987. In 1988, the price level at Germany and United States stands at 102 and 106, respectively. If the 1987 USD/DEM exchange rate was 0.54, what should the exchange rate be in 1988? In fact, the exchange rate in 1988 was USD/DEM 0.56. What might account for the discrepancy?
Homework Answers
Exchange Rate in 1988 = Current Rate * US price Level / Germany Price Level
Exchange Rate in 1988 = 0.54 * 106 / 102
Exchange Rate in 1988 = $0.5612
The Major reason behind discrepancy between exchange rate is due to investment in non dollar assets which depreciates dollar value.
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