If a PPP Estimate of the Dollar/pound Exchange Rate Is

question 13

Multiple Choice

If a PPP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is observed to be $1.68/£, on the basis of these two rates you should, viewing the long run,

• A) expect the pound to appreciate against the dollar.
• B) expect the dollar to appreciate against the pound.
• C) take a "short" position in dollars.
• D) have no expectation regarding the likely movement of the dollar/pound exchange rate.