Assume PPP Holds at a Time When the Exchange Rate

question 101

Essay

Assume PPP holds at a time when the exchange rate is DM1.09/$(Canadian) and a market basket of goods costs DM500.How many Dollars would you expect to spend on the goods? Germany is expecting 10% inflation while Canada is expecting 4% inflation.What would you predict to happen to exchange rates?

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Definitions:

Appreciation

A term used in finance and economics to describe the increase in value of an asset over time.

GPS

Global Positioning System, a satellite-based navigation system that provides location and time information in all weather conditions.

Satellite Global Positioning System

A network of satellites that provide navigation data to military and civilian users around the globe, enabling users to determine their exact location.

Depreciation

The accounting process of allocating the cost of a tangible asset over its useful life, representing wear and tear, or obsoleteness.