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DOUBT – 1 )
while calulating expected spot rate using purchasing power parity do we use nominal rate of interest or real rate of interest?BPP revision kit mock examination 1 september 2016 question no 12
doubt 2 ) country x has 5% expected inflation is that nominal or real?
doubt 3) assuming 5% is the real interest rate fo country X we calculaed the nominal interest rate as 7.06
DOUBT 4) in the solution when calculating the spot rate we are multiplying 1.5 by 1.02 /1.05
Since we have to use nominal rate the calculation should have been 1.5*(1.04/1.0706) right?
1. Purchasing power parity uses the inflation rate, not the interest rate.
2. There is no such thing as nominal inflation and real inflation. It is the interest rate that is nominal or real.
3. 5% is not the real interest rate for country X and you cannot assume that it is.
4. The expected spot rate in one years time is calculated correctly in the answer, using purchasing power parity.
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