Consumer price index-annual compounded inflation rate

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Reference no: EM13994736

You are given the following information on the Consumer Price Index (CPI) in three countries: US Japan UK Dec. 2010 138 1205 442 Dec. 2015 163 1335 557 In December 2010 the Yen/$ spot rate was ¥83.0025/$, and the $/£ ex-rate was $1.5595/£. a. Calculate the average, annual compounded inflation rate in each country from Dec. 2010 to Dec. 2015, using a time value of money calculation on your financial calculator, based on the formula: PV (1 + i)n = FV. Round to 2 decimal places, e.g. 3.45%. b. If relative Purchasing Power Parity (PPP) is holding, should the USD have appreciated or depreciated against the Yen and Pound during this period? Why? How much per year for each currency? Explain in an essay with full sentences and use the relative PPP equation (from the lecture notes) in your answer: e = %INFus - %INFF c. If relative PPP holds, the ex-rates as quoted above will change annually according to the difference in inflation rates. In that case, what should the ¥/$ and $/£ ex-rates (do not reverse the ex-rates) have been in December 2015? Assume that the exchange rate changes annually at a rate equal to the difference in inflation rates, and use a time value of money calculation on your financial calculator, based on the formula PV (1 + i)n = FV.

Reference no: EM13994736

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