Purchasing power parity Question doubt

[archived_user]

Came across a question.. pretty straight forward, but left me wondering about the solution.
Regina Drexel, CFA, an investment analyst for the Torn Curtain Currency Fund, is comparing the inflation rates in Bulgaria and Romania. The inflation rate in Bulgaria is 9.8% while the inflation rate in Romania is 4.8%. The exchange rate equals 2.18 Romanian leus to each Bulgarian lev. In five years, if she follows purchasing power parity, Drexel would expect the exchange rate to be closest to:
Click your answer choice below:

2.90 Romanian leus per Bulgarian lev.

2.07 Romanian leus per Bulgarian lev.

1.46 Romanian leus per Bulgarian lev.
Answer to Level III Question: C
Answer Explanation: In five years, the price level in Romania would be 26.4% higher than today, based on the 4.8% inflation rate, while the price level in Bulgaria would be 59.6% higher, based on the 9.8% inflation rate. The difference in price levels would be 33.2%, calculated as 59.6% - 26.4%. Purchasing power parity would predict that the Romanian leu would appreciate by 33.2% against the Bulgarian lev. The exchange rate would appreciate to (1 - 33.2%) x (2.18 Romanian Leus per Bulgarian Lev) = 1.46 Romanian leus per Bulgarian lev.
Choice “a” is incorrect. This choice occurs by adding the inflation differential rather than subtracting it.
Choice “b” is incorrect. This choice occurs by using the differential in the annual inflation rates rather than the differential in the price levels after five years.
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HERE, Why cant we use the formula here: Expected rate= 2.18* [1.048/1.098]^5 ??

 

[archived_user]

The relative PPP relationship states that %Δ in spot price A/B = inflation A - inflation B
Your expression is more reminiscent of the covered interest rate parity, where the rates are interest rates, not inflation rates.