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CFA Level 2
Economics

Estimating Future Exchange Rate Using PPP

Easy Currency Exchange Rates Parity Conditions

In the context of currency exchange rates, the concept of parity conditions plays a crucial role in understanding how different currencies relate to one another. One commonly discussed parity condition is Purchasing Power Parity (PPP), which asserts that in the absence of transportation costs and barriers to trade, identical goods should have the same price when expressed in a common currency.

Consider two countries: Country A and Country B. Country A has a current inflation rate of 4%, while Country B's inflation rate is 2%. If the current exchange rate between their currencies is 1.5 units of Country A's currency for 1 unit of Country B's currency, which of the following options best describes the expected exchange rate in the next year based on the Purchasing Power Parity theory?

Hint

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