Current Exchange Rates: $1.2 = 1 Canadian Dollar and 12 Mexican Pesos = $1
Current one-year Inflation Rates: 1% in Canada, 4% in Mexico, and 2% in the US
What should the cross rate be between Canadian Dollars and Pesos?
a) .12 Canadian Dollars = 1 Peso
b) .25 Canadian Dollars = 1 Peso
c) 9.96 Pesos = 1 Canadian Dollar
d) 14.4 Pesos = 1 Canadian Dollar
If purchasing power parity holds true, what is the expected exchange rate between US dollars and Mexican Pesos one year from now?
a) .08 US Dollars = 1 Peso
b) .15 US Dollars = 1 Peso
c) 9.96 Pesos = 1 US Dollar
d) 11.77 Pesos = 1 US Dollar