Reference no: EM132662143

Consider the following:

• The current ex- changerate between South African and Botswana Pula is ZAR1.46000 per Pula.
• The price level of a typical consumption basket in South Africa is 1.46 times the price level of a typical consumption basket in Botswana.
• One year later, price levels in SA have risen 2 percent, while price levels in Botswana has risen 4 percent.
• The new exchange rate is ZAR1.43080 per Pula
• You have calculated the current real exchange rate and the real exchange rate one year later. These calculations are as follows:

Current real exchange rate:

X = S x (P_FC / P_DC)

X= ZAR1.46(1/1.46) 

X= ZAR1 per Pula

Real Exchange Rate 1 year later

X = S x (P_FC / P_DC)

X= ZAR1.4308( 1.04/1.4892) 

X= ZAR1 per Pula

Required: Explain why the real exchange rate has not change from the current rate to the rate 1 year later.