Question

Following are the Consumer Price Index inflation rates each year for the United States and Japan. Also shown is the spot exchange rate for the beginning of each year.


A. Using PPP (equation 19.3), compute what the 1-year forward exchange rate should be each year.
B. Compare the forward rates computed in part (a) to the actual exchange rate at the beginning of the next year. How well does PPP predict the future exchange rate? Is it biased too high, too low, or aboutright?


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  • CreatedSeptember 23, 2014
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