Find the expected dollar and pounds exchange rate

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Reference no: EM131838885

The US inflation rate is expected to be 4.5% for the next five years, and the UK inflation rate is expected to be 2.5% per year. The US 5-year interest rate is 4.5% and the UK 5-year interest rate is 2%.

a) Using relative PPP find the expected $/pound exchange rate five years from today.

b) Using the intentional Fisher Effect find the expected $/pounds exchange rate five years from today.

c) Why are the answers are different.

Reference no: EM131838885

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