you are the manager at a U.S based firm that imports parts from sweden. your boss asked you to generate a forecast on the sweden krona for the next year to help him complete his capital budgeting report. assume that the krona is a free floating currency. you found the following information from the wsj and the imf web sites.

Spot rate of sweden krona (as of tuesday oct 28)=$0.1363

IMF projected inflation for 2015 in sweden = 1.4%

IMF projected inflation for 2015 in U.S. = 2.1%

1. based on the information that you found and assuming you believe Purchasing Power Parity (PPP) holds, what will be the value of the sweden krona in one year? what is the reasoning behind your answer? explain the forces that cause the exchange rate to change in the direction you predicted.

2. You also read that the Central Bank of Sweden is considering direct intervention to the influencce the value of the krona order to raise exports. what can the central bank do to reach their Goal? how will this influence your forecast from Part 1?

QUESTION 4s