You are planning to go on a one-week vacation in Europe in May 2026. Today's exchange rate is 0.88 euros per dollar. You are trying to determine how many dollars you will (likely) need in order to have 1,000 euros when you exchange your dollars for euros in 12 months. You expect a U.S. inflation rate of 4.1 percent and a Eurozone inflation rate of 2.2 percent in the next twelve months.

Based on this information and ignoring other short-term factors that may affect the exchange rate, you expect that you will need ______ dollars to purchase 1,000 euros.

Round your answer to the nearest dollar.

Question

You are planning to go on a one-week vacation in Europe in May 2026. Today's exchange rate is 0.88 euros per dollar. You are trying to determine how many dollars you will (likely) need in order to have 1,000 euros when you exchange your dollars for euros in 12 months. You expect a U.S. inflation rate of 4.1 percent and a Eurozone inflation rate of 2.2 percent in the next twelve months.

Based on this information and ignoring other short-term factors that may affect the exchange rate, you expect that you will need ______ dollars to purchase 1,000 euros.

Round your answer to the nearest dollar.

BlackTom AI · Accepted Answer

We start by restating the scenario and the data provided. You have 0.88 euros per dollar today, and you expect US inflation of 4.1% and Eurozone inflation of 2.2% over the next 12 months. You want to know how many dollars you'll likely need in 12 months to obtain 1,000 euros, ignoring other short-term factors.

First, understand how inflation differences affect the exchange rate under relative purchasing power parity (PPP). If the domestic price level rises faster than the foreign price level, the domestic currency tends to depreciate relative to the foreign currency. In this case, USD inflation (4.1%) is higher than EUR inflation (2.2%), so the USD is expected to depreciate relative to the euro. Therefore, the euro per dollar rate E_t is expected to be higher in 12 months than today’s E_0 = 0.88.

A common relative-PPP calculation is E_t = E_0 × [(1 + inflation_USD) / (1 + inflation_EUR)]. Plugging the numbers in:
- (1 + 0.041) = 1.041
- (1 + 0.022) = 1.022
- Ratio = 1.041 / 1.022 ≈ 1.019 (roughly 1.019)
- E_t ≈ 0.88 × 1.019 ≈ 0.897 (in euros per dollar)

Next, determine how many dollars are needed to secure 1,000 euros at the future rate. If 1 USD buys E_t euros, then to obtain 1,000 euros you need Dollars = 1,000 / E_t.
- Dollars ≈ 1,000 / 0.897 ≈ 1,115.7

Rounding to the nearest dollar gives about 1,116 dollars. Note that small differences in the exact rounding at intermediate steps (e.g., using 1.041/1.022 ≈ 1.0190 vs. 1.0195) can shift the final rounded dollar amount slightly (for instance, toward 1,110 or 1,116). The key idea is that the higher US inflation relative to Eurozone inflation implies more dollars are needed in 12 months to buy the same 1,000 euros.

In summary, applying relative PPP with the given inflation rates yields a future euro-per-dollar rate just under 0.90, which translates to a little over 1,100 dollars (specifically around 1,116) required to obtain 1,000 euros in 12 months.

类似问题

The price of a Big Mac in the U.S. is $3.41 and the price in Mexico is Peso 29.0. What is the implied PPP of the Peso per dollar?

Assume the implied PPP rate of exchange of Mexican Pesos per U.S. dollar is 8.50 according to the Big Mac Index. Further, assume the current exchange rate is Peso 10.80/$1. Thus, according to PPP and the Law of One Price, at the current exchange rate the peso is:

________ states that differential rates of inflation between two countries tend to be offset over time by an equal but opposite change in the spot exchange rate.

Which of the following is NOT correct about the law of one price and the purchasing power parity (PPP) theory?

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