Question: An Australian Solar Panel manufacturer exports panels to India at a price of INR5,000, INR is the Indian Rupee. The exchange rate is AUD/INR50.11. The forecast rate of inflation in Australia is 2.8% per year and 3.9% per year in India. Use this data to answer the following questions on exchange rate pass-through.
i. What was the export price for the solar panel at the beginning of the year expressed in Australian dollars?
ii. Assuming purchasing power parity holds, what should the exchange rate be at the end of the year?
iii. Assuming 100% pass-through of exchange rate, what will be the dollar price of a solar panel at the end of the year?
iv. Assuming 75% pass-through, what will be the dollar price of a solar panel at the end of the year?