b) Suppose that the current spot exchange rate of U.S. dollars for Australian dollars, Suss/As. is 0.757 (i.e. $0.757 US dollar 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.

b) Suppose that the current spot exchange rate of U.S. dollars for Australian dollars, Suss/As. is 0.757 (i.e. $0.757 US dollar 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.

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter6: An Introduction To The Foreign Exchange Market And The Balance Of Payments

Section: Chapter Questions

Problem 12E

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