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The inflation rate in country A is 5% per annum. The inflation rate in country B is 8.0% per annum. The current spot rate is 1 unit of currency of country A can purchase 7 units of currency of country B. Suppose Purchasing Power Parity holds. 1 unit of currency of country A will be able to purchase how many units of currency of country B one year from today?

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Answer: 7 units of currency from country B.

Explanation: If Purchasing Power Parity holds, it implies that the relative prices of goods and services in different countries will equalize over time. Therefore, if the current spot rate is 1 unit of currency of country A can purchase 7 units of currency of country B, it is likely that this exchange rate will remain stable in the future. Hence, one year from today, 1 unit of currency of country A will still be able to purchase 7 units of currency of country B.

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