Answers to Chapter Review and Self Test Problems

22.1 Based on relative PPP, the expected exchange rate in two years, E(S2), is:

E(S2) = So X [1 + (hNZ - hus)f where hNZ is the New Zealand inflation rate. The current exchange rate is NZ$ 1.66, so the expected exchange rate is:

E(S2) = NZ$ 1.66 X [1 + (.05 = NZ$ 1.66 X 1.022 = NZ$ 1.73

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