Sir,
A question from mock exam states as:
Julia forecasts that inflation in her country is likely to be 8% in the next year, falling to 4% in the year after, and the inflation rate in the US is likely to be only 2% next year but rising to 7% in the following year.
The current spot exchange rate is 1.42$'s to the euro.
On the basis of the forecast inflation rate, what should she expect the spot exchange rate to be in 2 years time?
I need your help in reaching the answer.
Thanks
Ask the Tutor ACCA FM
Mock exam (inflation rate)
7y ago#1You cannot have watched my free lectures because I go through examples of using the purchasing power parity formula that is given on the formula sheet! You really cannot expect me to type out all my lectures here!!
The current spot rate is $/€ 1.42.
Therefore, using the formula, the spot rate in 2 years time = 1.42 x 1.02/1.08 x 1.07/1.04 = 1.38
got it!
Thanks
7y ago#3You are welcome :-)
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