Question: Suppose that the current spot exchange rate of U S dollars
Suppose that the current spot exchange rate of U.S. dollars for Australian dollars, S US$/A$, is 1.0277 (i. e., $ 1.0277 can be received for 1 Australian dollar). The price of Australian-produced goods increases by 5 percent (i. e., inflation in Australia, IPA, is 5 percent), and the U.S. price index increases by 3 percent (i. e., inflation in the United States, IPUS, is 3 percent). Calculate the new spot exchange rate of U.S. dollars for Australian dollars that should result from the differences in inflation rates.
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