Using purchasing power parity theory, what GBP/USD spot rate would you expect to see in three months’ time?

The long-term prospects for inflation in the UK and the USA are 2% and 6% per annum respectively.

The GBP/USD spot rate is currently GBP/USD1.71.

Using purchasing power parity theory, what GBP/USD spot rate would you expect to see in three months’ time?
A . GBP/USD1.69
B . GBP/USD1.73
C . GBP/USD1.77
D . GBP/USD1.65

View Answer

Answer: B