The price of a machine produced by a US manufacturer is currently $23,000 and the current spot exchange rate is $0.75/A$. The US manufacturer exports this machine to Australia. The US inflation rate is 4.2% per annum and the Australian inflation rate is 2.6% per annum. Assume the purchasing power parity (PPP) holds.

Required

(i). Determine the machine's current price in Australia.

(ii). Determine the price of this machine in Australia one year from now if there is a 100% pass-through of exchange rates.

(iii). Determine the price of this machine in Australia one year from now if there is a 65% pass-through of exchange rates.

Answer rating: 100% (QA)

To determine the machines price in Australia under different scenarios well use the concept of purchasing power parity PPP and consider the inflation ... View the full answer