Suppose Russia’s inflation rate is 200% over one year but the inflatio

Suppose Russia’s inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swiss franc’s exchange rate against the Russian ruble?

What will be an ideal response?

ANSWER

(Eruble/franc, t – Eruble/franc, t-1)/Eruble/franc, t-1 = 2 – 0.02 = 1.98
So there will be a 198% depreciation of the ruble against the franc or, conversely, a 198% appreciation of the franc against the ruble.