Question
Suppose that the Australian dollar has an interest rate which is 5 percentage points higher than the U.S. rate, the Australian inflation rate is 2
Suppose that the Australian dollar has an interest rate which is 5 percentage points higher than the U.S. rate, the Australian inflation rate is 2 percentage points higher than the U.S. one, and the Australian dollar is 5% more expensive relative to the United States based on Purchasing Power Parity (PPP). Assume that these rate differences will continue for 4 years and that the valuation will go to parity over the period. Calculate the long-run expected return, report your answer in percent, do not enter the percent sign, and round to two decimal points.
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