Jones is asked to recall the correct representation of purchasing power parity. St is the exchange rate at time t, expressed in units of foreign currency per domestic currency. ID and IF are the expected rates of inflation in the domestic and foreign countries, and E( ) denotes an expected value. Which of the following is the CORRECT representation of purchasing power parity?
A. E(S0) / S1 = [1 + E(iFC)] / 1 + E(iDC)].
B. E(S1) / S0 = [1 + E(iDC)] / 1 + E(iFC)].
C. S0 / E(S1) = [1 + E(iFC)] / [1 + E(iDC)].
D. S1 / S0 = [1 + E(iFC)] / [1 + E(iDC)].
Answer:D
Jones is asked to recall the correct representation of purchasing power parity. St is the exchange rate at time t, expressed in units of foreign currency per domestic currency. ID and IF are the expected rates of inflation in the domestic and foreign countries, and E( ) denotes an expected value. Which of the following is the CORRECT representation of purchasing power parity?
A. E(S0) / S1 = [1 + E(iFC)] / 1 + E(iDC)]. B. E(S1) / S0 = [1 + E(iDC)] / 1 + E(iFC)]. C. S0 / E(S1) = [1 + E(iFC)] / [1 + E(iDC)]. D. S1 / S0 = [1 + E(iFC)] / [1 + E(iDC)].