Accurate estimator of exchange rate movements

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Reference no: EM131159542

Part A:

Is purchasing power parity (PPP) always an accurate estimator of exchange rate movements? Why or why not?

Part B:

Suppose, the price of a luggage set in New York, USA is currently $200. The same luggage set is priced at A$250 in Brisbane, Australia. Given these information: i. Determine the spot rate for A$/$ if the PPP principle holds. ii. What will be the price of this luggage set in Brisbane one year from now if the PPP holds, the US price of the luggage set remains unchanged, the US inflation rate is 0.5% and Australian inflation rate is 4%?

Reference no: EM131159542

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