Canadian inflation is predicted to be 5% next year. The Barnes group tells you that inflation in England is expected to be 3%. The current exchange rate is 2.11 per $1. What is your best guess as to next year's exchange rate?

A) 1.201 per $1
B) 1.385 per $1
C) 1.723 per $1
D) 2.069 per $1
E) 2.152 per $1

Question

Ramen Abraham · Accepted Answer

Final Answer : D, Explanation :  The exchange rate can be estimated using the relative purchasing power parity, which considers the inflation rates of the two countries. The formula is: Future Exchange Rate = Current Exchange Rate * (1 + Inflation Rate of Domestic Country) / (1 + Inflation Rate of Foreign Country). Applying this: 2.11 * (1 + 0.05) / (1 + 0.03) = 2.069.

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