Suppose that the spot exchange rate for the Hungarian forint is HUF 221. You expect the inflation rate to be 1.6% per year in the United States and 3.5% per year in Hungary. You Wish to forecast the future exchange rate.

a) Given the information above, what version of Purchasing Power Parity (PPP) would you use to come up with a forecast of the future exchange rate: Absolute PPP or Relative PPP? As part of your answer, explain the difference between the two versions of the theory.

b) Use the appropriate version of the PPP to compute a forecast of the exchange rate as of 3 years from now.

Thank you for your help!