Question

0. Three-years ago the AUD/ARS exchange rate was 11.66 and today the exchange rate now sits at AUD/ARS 41.80. Australia has had inflation rates of 1.97%, 1.93% and 1.61% over the last 3 years. In Argentina the inflation rates have been 33%, 25% and 55%.

   (a) Calculate today's real FX value of the AUD adjusted for the past three year's inflation differential (show all working).

   (b) Has the AUD appreciated or depreciated in real terms over the three-year period against the peso? Explain how you know this.

Answer 1

a)

Please see the below real FX rates for AUD / Peso

		Inflation
Currency	Year 0	Year 1	year 2	year 3
AUD		1.97%	1.93%	1.61%
Argentina Peso		33%	25%	55%
Coutry Inflation Variance		31.03%	23.07%	53.39%
AUD / ARS Exchange Rate	11.66	15.2781	18.80276	28.84155

Country with high inflation should have high deprection in their currency exchange.

b)

Aud appreciated in real terms but when we check the actual exchange rate AUD/ARS, it is 28.84.

But here in actual it is 41.80, but we canot say that it is not fairly valued as country Argentina has high inflation rate, hence their currency peso has high depreciation rate.

AUD has appreciated as Austraia has less inflation rate compared with Argentina.