Assume the spot market exchange rate for $1 is currently A$1.2902. Also assume the expected inflation rate is 3.3 percent in Australia compared to the U.S. rate of 2.8 percent. What is the expected exchange rate one year from now if relative purchasing power parity exists?
A) A$1.2837
B) A$1.2062
C) A$1.2286
D) A$1.2967
E) A$1.1484
D) A$1.2967
Explanation: E(S1) = A$1.2902[1 + (.033 ? .028)]1
E(S1) = A$1.2967
Business
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