Final answer:
The expected exchange rate one year from now, given the current exchange rate of 0.55 pounds to a dollar, UK inflation of 2%, and US inflation of 4%, is about 0.54 pounds, under the theory of relative purchasing power parity. Option (c) 0.528 pounds is the closest to the calculated expected exchange rate.
Step-by-step explanation:
The student has asked about the expected exchange rate one year from now if relative purchasing power parity exists, given the current exchange rate and inflation rates of the UK and US. According to the theory of relative purchasing power parity, the change in the exchange rate between two countries' currencies over a period should roughly equal the difference in their inflation rates. Since the current exchange rate is $1 = 0.55 pounds, with a UK inflation rate of 2% and a US inflation rate of 4%, the expected exchange rate one year from now can be calculated as follows:
Expected Exchange Rate = Current Exchange Rate x (1 + Home Country Inflation Rate) / (1 + Foreign Country Inflation Rate)
Expected Exchange Rate = 0.55 x (1 + 0.02) / (1 + 0.04) = 0.55 x 1.02 / 1.04 = 0.55 x 0.9808 = 0.53944 pounds
The expected exchange rate is approximately 0.54 pounds, which is not one of the options provided. However, option (c) 0.528 pounds is the closest to the calculated value.