In the question for 16-week online class, #2, the currency of Barstonia is called barst. I calculated the inflation rate as (300-100)/100=2. The answer sheet calculated the inflation rate as 300/100=3, why? I believe my way of calculation is the correct way to calculate the inflation rate. Thanks.
They don’t calculate the inflation rate in the answer. The answer uses PPP formula. Also, this is a question where we don’t even really need to do calculations. We know the Barst is depreciating therefore 6 is the only answer that is possible. Not sure if that helps or not. Good luck with your studies.
Edit-- Your formula of calculating the inflation rate is correct though. It’s just not part of the answer used by Schweser. Even if we use your method…“inflation” in Barstonia would be 2 as you say, and 0.5% in USA. (150-100)/100. With a higher inflation rate in Barstonia, we know the currency should depreciate from 3 per dollar, making 6 the best answer.
Thank you, I know I don’t have to calculate to get the right answer. But in case in the exam I do need to calculate, I’ll be in trouble if I’m not clear on this topic. jabroni , could you show me the process how they use PPP to get the answer?