There has been a general shift from fixed to flexible exchange rates worldwide. In 1976, pegged rate regimes were the norm in Africa, Asia, the Middle East, part of Europe, and the Western Hemisphere. By 1996, flexible exchange rate regimes predominated in all these regions.

a)Explain what you understand by the purchasing power parity theory. How do you account for its poor performance at explaining exchange rate movements since 1973?(15 Marks)

b)"Forecasting exchange rates is essentially a waste of effort." Discuss

(10 Marks)