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CFA Level 2
Economics

Future Nominal Exchange Rate Prediction

Very Hard Currency Exchange Rates Parity Conditions

Consider the following scenario involving two countries, A and B, which have differing inflation rates. Country A has an inflation rate of 3%, while Country B experiences 7% inflation. The current nominal exchange rate between the currencies of these two countries is 1 A-Currency = 0.75 B-Currency.

According to the concepts of currency exchange rates and parity conditions, particularly relative purchasing power parity (PPP), what would you expect the nominal exchange rate to be in one year if this inflation trend continues?

Hint

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