At the beginning of the year, the exchange rate between Country X’s dollar (X$) and Country Y’s pound (Y£) stands at X$4.80 : Y£1. Over the year, prices rise by 10% in Country X and by 20% in Country Y. Using Purchasing Power Parity theory, what exchange rate would you expect at the end of the year?
- AX$4.40 : Y£1
- BX$4.90 : Y£1
- CX$5.00 : Y£1
- DX$5.20 : Y£1