Question

the annual inflation rate in the u.s is expected to be 1.99 percent and the annual inflation rate in poland is expected to be 4.53 percent. the current spot rate between the zloty and dollar is z4.1184/$. assuming relative purchasing power parity holds, what will the exchange rate be in four years?

Answer 1

According to the concept of relative purchasing power parity, the estimated exchange rate between the zloty and the dollar in four years would be 4.2906 zloty per dollar.

Step-by-step explanation:

According to the concept of relative purchasing power parity, the exchange rate between the zloty and the dollar should adjust to reflect the difference in the expected inflation rates between the US and Poland. Let's assume the initial exchange rate is 4.1184 zloty per dollar.

To calculate the future exchange rate in four years, we can use the formula:

Future exchange rate = Spot rate * (1 + inflation rate of the other country) / (1 + inflation rate of the home country)

Using the given inflation rates (1.99% for the US and 4.53% for Poland), the estimated exchange rate in four years would be:

Future exchange rate = 4.1184 * (1 + 0.0453) / (1 + 0.0199)

= 4.2906 zloty per dollar