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If both information i.e interest rate inflation rate in both country is given, would expected spot rate will be the same? or if the calculation sum up to different rate, which one will prevail?
In a perfect world, interest rate parity and purchasing power parity would give the same result (since in theory interest rates and inflation rates move together).
In practice they do not give the same result, and for the exam inflation rates are regarded as being a better predictor of future exchange rates.
(However, interest rates are always used to determine forward rates – both in real life and, if relevant, in the exam.)
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