Reference no: EM132036751

1. You are planning a one-month vacation in Sydney, Australia a winter vacation a year later. The present 1-month charge for a suitable hotel room with Koala buffet breakfast is 9,300 A$, or 6,000 US$ at the present exchange rate of 1.55A$/US$. The hotel maintains a policy to preserve real income in Australian dollars, so the present room rental rate will be adjusted upward or downward for any change in the Australian cost of living between now and then.

Note: For calculation results, all exchange rates should round to 4th decimal place, and all costs should round to whole numbers (without decimal digits).

(a) Suppose you expect the Australian inflation to be 4% and the U.S. inflation to be 8% over the coming year. As a firm believer in the theory of Purchasing Power Parity, how many U.S. dollars will you need one year later to pay for your hotel room charge?

(b) After a more careful study, you decide to adjust the Australian inflation estimate to 6% (with the U.S. inflation estimate remains unchanged). Now re-calculate the amount of U.S. dollars necessary to pay for one-month hotel charge a year later.

(c) Referring to your answers to (a) and (b), do you have to pay more, or less, or the same after a change of the estimated Australian inflation rate? Why?