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The Danish krone changes from A$0.7877 each at the start of 2020 to A$0.8027 each at...

The Danish krone changes from A$0.7877 each at the start of 2020 to A$0.8027 each at the end of 2020. Over that same year, inflation in the prices of all goods and services in Denmark is 7.3%, whereas in Australia it is 3.9%. What is the amount of real decrease (-) or real increase (+) that the Danish krone experiences against the Australian dollar during 2020?

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Answer #1

To determine the real changes we will determine changes arises in total and changes arises due to inflation.

Real Changes = Forward Rate - Forward Rate ( as Per PPP Theory)

= A$ 0.8027 - A$ 0.7627

= A$0.04

Therfore Real increase in denish Kroner is by A$ 0.04

Calculation of Forward Rate using Purchasing Power Parity Theory (PPP Theory)

Forward Rate = Spot rate * ( 1+ ia) / (1 + id)

= 0.7877 * 1.039 / 1.073

= A$ 0.7627

Here ia = Inflation Rate in Australia

id = Inflation Rate in Denmark

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