a$)$ Explain the theory of purchasing power

parity $($PPP$).$ Based on this theory, what is a

general forecast of the values of currencies in

countries with high inflation?

$(2$marks$)$

b$)$ Today's spot rate of the Ghana Cedi is

$$0\mathrm{.}22.$ Assume that purchasing power parity holds.

The U$.$S$.$ inflation rate over this year is expected to

be $5$ percent, while Ghana's inflation over this year

is expected to be $9\mathrm{.}8$ percent. E$5$ Company Ltd is a

Ghanaian company it plans to import from the

United States and will need $20$ million US dollars

in $1$ year. Determine the expected amount of cedis

to be paid by the E$5$ Company Ltd for US dollars

in $1$ year. $($Please take Ghana as the home country$).$