CFA Level I · CFA Level I Exam · Capital Flows and the FX Market
Expected inflation is 5.0% in Country A and 2.0% in Country B. According to relative purchasing power parity, the currency of Country A is most likely expected to:
Country A's currency is expected to depreciate by about 3.0% against Country B's currency. Relative purchasing power parity says the currency of the higher-inflation country weakens by roughly the inflation differential, here 5.0% minus 2.0%, so that real exchange rates stay constant.
- Aappreciate by about 3.0% against Country B's currency
- Bdepreciate by about 3.0% against Country B's currencyCorrect
- Cremain unchanged against Country B's currency
Explanation
Relative PPP says the change in the exchange rate roughly offsets the inflation differential. The higher-inflation currency is expected to depreciate by about the difference, 5.0% - 2.0% = 3.0%. Appreciation reverses the sign of the differential.
Did you get it right without looking?
One question tells you little. A timed set on Capital Flows and the FX Market shows your real accuracy, how long you take and where you lose marks.
More Capital Flows and the FX Market questions
- Large, sustained capital inflows into an emerging market that has a flexible exchange rate are most likely to cause the domestic currency to…
- A dealer quotes USD/CHF at 0.9100 bid and 0.9106 ask. A client buys 1,000,000 USD from the dealer. The amount of CHF the client most likely …
- The real exchange rate between two currencies is best described as the nominal exchange rate:
- A country with a fixed exchange rate has a large current account deficit and falling foreign reserves. Investors begin to expect a devaluati…
- An economy has a government budget deficit of 4% of GDP, private saving of 22% of GDP, and private investment of 20% of GDP. Using the savin…
- A dealer quotes the EUR/USD spot rate as 1.0790/1.0810 (bid/offer, USD per EUR). A client who wants to sell EUR 2,000,000 to the dealer will…