Question

Suppose​ Russia's inflation rate is 100 percent over one year but the inflation rate in Switzerland is only 5 percent. According to relative​ PPP, over the year the Swiss​ franc's exchange rate against the Russian ruble ​(Upper E Subscript SFr divided by Upper R​) should

Answer 1

Relative PPP predicts that the Swiss franc should increase in value against the Russian ruble, given that Russia's inflation rate is substantially higher than Switzerland's.

Step-by-step explanation:

According to relative Purchasing Power Parity (PPP), when comparing two countries, the one with the higher inflation rate will likely see its currency depreciate against the country with the lower inflation rate.

In the scenario where Russia's inflation rate is 100 percent and Switzerland's inflation rate is 5 percent, relative PPP suggests that the Swiss franc's exchange rate against the Russian ruble (Upper E Subscript SFr divided by Upper R) should increase.

This is because the higher inflation rate in Russia makes its currency less valuable relative to the Swiss franc, which has a lower inflation rate.

As a result, it is expected that the Swiss franc would strengthen against the Russian ruble over the year.

Answer 2

fall by 95 percent.

Step-by-step explanation:

Since the inflation rate in Russia was 100%, the rubble lost 50% of its purchasing power. While the Swiss Franc only lost 2.5% of its purchasing power (inflation rate of 5%). The PPP between the Russian ruble and the Swiss Franc decreased to only = -2.5% / -50% = 0.05 or 5%. That means that the Russian ruble lost 100% - 5% = 95% of its purchasing power in just 1 year due to its high inflation.