Answer the following questions once you have collected all the necessary data as
per Section 1.
2.1 Use the realised rates of inflation for both countries from the start of the sample
period to the end of the sample period to calculate the RPPP-implied exchange rate.
In other words, suppose we are in the year and quarter corresponding to the start of
the sample period, and we want to forecast the exchange rate one year ahead. Repeat
for each quarter in the sample period.
You can refer to Exhibit 4-7 in the textbook (page 151) to give you a sense of what is
being expected. How well does RPPP explain the exchange rate? You will need to
compare the RPPP-implied exchange rate with the realised exchange rate. Plot the
two time series in a graph. The word limit in this question is 150 words. (2 marks)
2.2 Calculate the value of the real exchange rate at the end of the sample period,
and compare it with the value of the real exchange rate at the start of the sample
period. Provide brief commentary about the reasons for the change or lack thereof in
the real exchange rate in no more than 150 words. You should focus on the effect of
inflation rates, real interest rates, and which agents in the two economies benefitted
from the changes in the real exchange rate (for example, were importers or exporters
the main beneficiaries?) (2 marks)
