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Determining the current exchange rate

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The exchange rate between the United States of Albion (U.S.A.) and the Republic of Oz is now 1:1 with in?ation in both countries expected to be 2% and interest rates 4%.

(a) What does PPP imply about the exchange rate in 20 years time?

(b) If in?ation in the U.S.A. increases to 3% how does your answer change?

(c) What happens to the current exchange rate if U.S.A. interest rates rise to 5% along with in?ation increasing to 3%?

Reference no: EM131108075

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