Another Exam 2PM Q: Econ/PPP

simplistic

Exam 2 # 112:

In this Q you have to find out what the future spot rate should be and then compare to the actual future spot rate to say if the Canadian $ appreciated or depreciated in real terms. So the way I did it was with PPP: $0.5 x (1.02/1.07) = $0.476. But the solution says to do $0.5 x (1-0.05) = $.475. I know that I'm being a stickler and it's only one thousandth of a decimal point off, but I'm asking about the method used--iisn't Schweser wrong? I feel like they're using a "simplistic, rough estimate" or guess and my way (PPP) is correct. Does anyone remember this Q? Thanks.

ayodayo

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发表于 2011-7-11 15:19 | 只看该作者

You got basically the same number and should have the same answer. It's the same thing as nominal=real+inflation - this is technically not the right way as it should be nominal=(1+real)x(1+inflation)-1, but you would be off just a bit.

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jacksparrow

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发表于 2011-7-11 15:19 | 只看该作者

(1 + a) / (1 + b) is approximately equal to a-b when a and b are relatively small #s.

so you could do it either the long way as 1.02/1.07 or (1-0.05) and as you yourself have attested the number is not a whole lot different, in the final analysis.

CP

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maryli

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发表于 2011-7-11 15:19 | 只看该作者

last minute question if anyone can help.

not really understanding the reasoning behind the answer. Nominal spot rate in one year is .350 C/$ and Future spot rate is 0.476

Doesn't this mean C appreciated in real terms?

obviously not, but can someone explain to me why.

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