Inflation and Exchange Rate Dynamics Analysis | Kinh tế chính trị Mác - Lênin | Đại học Tôn Đức Thắng

The expected inflation rate in Canada is 2% higher than in the U.S., as indicated by
the difference in nominal interest rates. According to the Purchasing Power Parity
(PPP) theory, if these inflation expectations are accurate, the Canadian dollar is
expected to depreciate by approximately 2% relative to the U.S. dollar.
If both U.S. and Mexican investors expect the same real return, any nominal
interest rate difference is explained by the expected inflation gap. In this case,
Mexico's inflation rate is projected to be 40% higher than the U.S. rate. According
to the Purchasing Power Parity (PPP) theory, the Mexican peso is expected to
depreciate by roughly 40% relative to the U.S. dollar. With a nominal interest rate
of 48% in Mexico and an anticipated depreciation of 40%, U.S. investors should
earn an effective return of approximately 8%. (This estimate is based on a
simplified calculation to emphasize the underlying concept rather than accuracy.)
Based on the Purchasing Power Parity (PPP) theory, the British pound is expected
to depreciate by 4.7%. As a result, the adjusted spot exchange rate would be
calculated as $1.73 × (1 - 0.0467), yielding approximately $1.649.
The expected spot rate is calculated as $0.70 × (1 + 0.0374), resulting in
approximately $0.7262. This expected change in the spot rate is driven by the
inflation differential, which can be inferred from the interest rate differential.
a. As prices in Russia increase, the purchasing power of Russian consumers
declines. This motivates them to buy foreign goods, leading to a higher
supply of rubles on the market. Additionally, foreign demand for rubles is
low due to Russia's high inflation. As a result, the ruble is likely to
depreciate against the U.S. dollar and other currencies.
b. PPP suggests a general relationship where high inflation should lead to
currency depreciation. While this relationship is supported, it may not be
exact. Political conditions in Russia, such as trade restrictions or currency
controls, may limit consumers’ ability to purchase foreign goods.
Furthermore, the government may intervene to prevent the ruble from
reaching its true equilibrium value.
c. Russian goods may still be more expensive than U.S. goods from the
perspective of Russian consumers, even after accounting for exchange rates.
This is because the ruble may not depreciate enough to fully counterbalance
inflation. Restrictions on trade and currency conversion may also hinder full exchange rate adjustment.
d. For U.S. importers, high inflation in Russia may not be entirely offset by the
ruble's depreciation. As a result, imported Russian goods may become more
expensive, which could lead to decreased U.S. demand for these goods.
a. Based on the IFE, the projected spot rate for the euro after one year is 1.03
$1.079, reflecting a 1.9% depreciation, calculated by: - 1 = -1.9%. 1.05
b. If the spot rate is $1.00 after one year, Beth will receive $95,454.55,
resulting in a return of -4.55%.
c. With a spot rate of $1.08 after one year, Beth would have a 3.09% return on her investment.
d. For Beth’s strategy to succeed, the euro must trade above $1.079 after one year. 1.07
Using the PPP formula, the expected change in the exchange rate is - 1 = 1.03
3.8835%. Therefore, the future spot rate is projected to be $0.1038835 per peso.
Carolina would need $.1038835 × 20 million pesos = $2,077,710 to pay for 20 million pesos.