Problem:
In the spot market, $1 is currently equal to A$1.4910. Assume the expected inflation rate in Australia is 3.5 percent and in the U.S. 4.0 percent.
Required:
Question: What is the expected exchange rate one year from now if relative purchasing power parity exists?
- A$1.4810
- A$1.4835
- A$1.4875
- A$1.4985
- A$1.5005
Note: Provide support for your rationale.