Change in pound value over the next year

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Reference no: EM131556933

Consider the following starting values for US Price Index = 600 and UK Price Index = 500. Spot exchange rate is $1.5/pound. Suppose one year later the price levels are expected to rise to 612 and 505 in US and UK respectively. Assume relative PPP holds.

a) What are ther expected inflation rates in US and UK?

b) What is the expected % change in pound's value over the next year?

(show necessary work)

Reference no: EM131556933

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