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You observe the one-year expected inflation rate at home and foreign is 5% and 4%, respectively. You also observe the current real exchange rate q(home/foreign)
You observe the one-year expected inflation rate at home and foreign is 5% and 4%, respectively. You also observe the current real exchange rate q(home/foreign) is 1.25. According to the speed of convergence, which says that the deviation from the purchasing power parity will shrink by 15% per year, what is the expected depreciation rate of home currency against the foreign currency (rounded to 2 decimal places)? Question 5Answer a. 2% b. -4% c. 6% d. -2% e. 4% f. -6%
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