ACCA FM · Chapter 14 · Question 5 of 10
The current spot rate is 2.0000 dinars per $1. Expected annual inflation is 6% in the country using the dinar and 2% in the US. Using purchasing power parity theory, what is the expected spot rate in one year (dinars per $1, to 4 decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 2.0784
Explanation
PPP: expected future spot = spot x (1 + inflation in the dinar country) / (1 + US inflation) = 2.0000 x 1.06 / 1.02 = 2.0784. The dinar is expected to weaken because its inflation is higher, so more dinars will be needed per dollar. 1.9245 inverts the inflation ratio.
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