Question
The following market data is available. annual U.S. interest rate = 4.40% spot $/ = 1.20 annual U.S. expected inflation rate = 2.00% annual eurozone
The following market data is available. annual U.S. interest rate = 4.40% spot $/ = 1.20 annual U.S. expected inflation rate = 2.00% annual eurozone interest rate = 3.20% annual eurozone expected inflation rate = 1.40% PUS = $5,200 PEZ = 3,200
(a) According to relative PPP, what is the expected value of the dollar in three months?
(b) According to uncovered interest parity, what is the expected value of the dollar in six months?
(c) According to absolute PPP, what is the correct value of the euro?
(d) Explain the economic thinking of absolute PPP regarding why the existing exchange rate will move to the PPP predicted exchange rate.
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History Of Financial Institutions Essays On The History Of European Finance 1800–1950
Authors: Carmen Hofmann , Martin L. Müller
1st Edition
1138325007, 978-1138325005
