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as much as possible inflation rate differential Consider the following information: The Canadian dollar- US dollar spot exchange rate is 1.5 Canadian dollars per US
as much as possible inflation rate differential
Consider the following information: The Canadian dollar- US dollar spot exchange rate is 1.5 Canadian dollars per US dollar. The inflation rate in Canada is 2% and inflation rate in the US is 2.5%. Assume that a basket that costs 100CAD in Canada, costs 115CAD in the US. The speed of convergence to absolute PPP is 15% per year. a. What is the expected inflation rate differential? b. Compute the real exchange rate. c. Is the Canadian dollar overvalued/undervalued? If yes, by how much? d. Forecast the Canadian real exchange rate with the US one year from now. e. What is the expected rate of real depreciation for the Canadian dollar? t. What is the expected rate of nominal depreciation for the Canadian dollar? g. Based on the above calculations, forecast the spot exchange rate one year from now. Consider the following information: The Canadian dollar- US dollar spot exchange rate is 1.5 Canadian dollars per US dollar. The inflation rate in Canada is 2% and inflation rate in the US is 2.5%. Assume that a basket that costs 100CAD in Canada, costs 115CAD in the US. The speed of convergence to absolute PPP is 15% per year. a. What is the expected inflation rate differential? b. Compute the real exchange rate. c. Is the Canadian dollar overvalued/undervalued? If yes, by how much? d. Forecast the Canadian real exchange rate with the US one year from now. e. What is the expected rate of real depreciation for the Canadian dollar? t. What is the expected rate of nominal depreciation for the Canadian dollar? g. Based on the above calculations, forecast the spot exchange rate one year from now Step by Step Solution
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