Question: Suppose, the price of a luxury watch in the US is…
Suppose, the price of a luxury watch in the US is currently $450. The same watch is priced at a$610 in Australia, and €430 in Germany. Given these information:
- Determine the spot rate for A$/$ and for €/$ if the PPP principle holds.
- What will be the price of this luxury watch in Australia and Germany one year from now if the PPP holds, the US price of the watch remains unchanged, the US inflation rate is 1.6%, the German inflation rate is 1.0% and the Australian inflation rate is 1.25%?
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