Question
Assume a forecaster uses PPP to forecast exchange rates. Assume that the current exchange rate is (USD/AUD) 1.8000 and the forecaster is trying to forecast
Assume a forecaster uses PPP to forecast exchange rates. Assume that the current exchange rate is (USD/AUD) 1.8000 and the forecaster is trying to forecast the exchange rate one year from now. The following four scenarios are available for expected inflation rates during the coming year:
Scenario - Inflation Australia - Inflation U.S. - Probability
1. High inflation both: 10% - 8% - 0.19
2. High inflation Australia: 10% - 2% - 0.20
3. High inflation U.S: 3% - 8% - 0.15
4. Low inflation both: 3% - 2% - 0.55
(a) Calculate the forecast exchange rate for each scenario
(b) Calculate the weighted average (or expected) forecasted exchange rate
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