Answer to Question #248020 in Economics of Enterprise for pragas

Question

Based on the historical movement of AUD/EUR exchange rate, predict what the rate will be on 31 December 2021 (3 months from now).

b) Discuss the effect of Purchasing Power Parity on AUD/EUR exchange rate on 31 December 2021. (What key points should be mentioned when answering this question?)

Answer 1

Solution:

a.). The current AUD/EUR exchange rate is 0.6299 and according to the historical movement, as at 31 December 2021, the AUD/EUR exchange rate will be 0.643

 

b.). Purchasing power parity refers to the process of equalizing the purchasing power of two currencies while accounting for variations in cost of living and inflation. International comparisons are more accurate when rates are adjusted to account for changes in local buying power, a practice known as PPP adjusted exchange rates.

Purchasing power parity will ensure that the price levels between the two countries are equal. This means that the products in each country will cost the same once currencies have been exchanged.

The key points that should be mentioned are price levels between the two countries, inflation, and purchasing power between the two countries.