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Unformatted text preview: Quiz 4 1. Purchasing Power Parity (PPP) theory states that A. the exchange rate between currencies of two countries should be equal to the ratio of the countries' price levels. B. as the purchasing power of a currency sharply declines (due to hyperinflation) that currency will depreciate against stable currencies. C. the prices of standard commodity baskets in two countries are not related. D. both a) and b) 2. As of today, the spot exchange rate is 1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail? A. 1.00 = $1.2379 B. 1.00 = $1.2623 C. 1.00 = $0.9903 D. $1.00 = 1.2623 Answer: F($/) = S($/)x(1+ $ )/(1+ ) = 1.25x(1+2%)/(1+3%) = $1.2379/ 3. If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K., and the dollar depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP...
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- Spring '11
- Exchange Rate