Question
Suppose the current exchange rate for the Russian ruble is RUB 34.53. The expected exchange rate...
Suppose the current exchange rate for the Russian ruble is RUB 34.53. The expected exchange rate in three years is RUB 37.75. What is the difference in the annual inflation rates for the United States and Russia over this period? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Difference in the annual inflation rate
Answers
Using the relative purchasing power parity equation:
Ft = S0 × [1 + (hFC – hUS)]t
R37.75 = R34.53[1 + (hFC – hUS)]3
hFC – hUS = (R37.75/R34.53)1/3 – 1
hFC – hUS = 0.0302 or 3.02%
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