Using the theory of purchasing power parity and forecasts of expected inflation over the next year, forecast the spot exchange rate for the above for one year in the future.

S₂ = S₁ ∙ 1+ Expected (Annual Foreign Inflation)1+ Expected (Annual US Inflation)

where S₁ = Current spot rate expressed in European terms S₂ = Spot rate in one year expressed in European terms

Utilize the following data:

• S₁ = Current spot rates in one year expressed in European terms from above.
• Each country’s Inflation, GDP deflator (annual %) from your last week’s worksheet.
• US Inflation, GDP deflator (annual %) of 1.8%. (Instructor may update)

1. United Kingdom -

Future Spot Rate in One Year Based on Estimated Inflation Rates

Show initial equation and its terms and not just the final answer for full credit.

2. Tanzania

Future Spot Rate in One Year Based on Estimated Inflation Rates

Show initial equation and its terms and not just the final answer for full credit.

TZS -

1 Dollar = 2,298.20

1 TZS = 0.00044

GBP

1 Dollar = 0.79

1 Pound = 1.27

TZS INFLATION - 2.7

GBP INFLATION - 2.2

US INFLATION RATE 1.8