If the annual inflation rate is 2.15 percent in the U.K. and 2.91 percent in the...

If the annual inflation rate is 2.15 percent in the U.K. and 2.91 percent in the U.S., and the dollar appreciated against the pound by 2.1 percent, then estimate the real exchange rate implied by PPP conditions.

Expert Solution

Dollar appreciated aginst the pound by 2.1%.

This implies that in absence of inflation, real exchange rate of pound fell by 2.1%

In presence of inflation:

Real exchange rate USD/GBP = (1+2.1%) *Inflation in UK/Inflation in USA

= 1.021*1.0215/1.0291 = 1.01346

OR, In Real exchange rate terms USD appreciated against GBP by 1.346% only.

jeff jeffy answered 2 years ago

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If the annual inflation rate is 2.15 percent in the U.K. and 2.91 percent in the...

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