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Exam 8: Relationships Among Inflation, Interest Rates, and Exchange Rates

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Question 21

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Given a home country and a foreign country, purchasing power parity suggests that:

A) the inflation rates of both countries will be the same.
B) the nominal interest rates of both countries will be the same.
C) A and B
D) none of the above

E) A) and D)
F) C) and D)

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Question 22

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According to the IFE, when the nominal interest rate at home exceeds the nominal interest rate in the foreign country, the home currency should depreciate.

A) True
B) False

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Question 23

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Purchasing power parity (PPP) focuses on the relationship between nominal interest rates and exchange rates between two countries.

According to the international Fisher effect, if U.S. investors expect a 5% rate of domestic inflation over one year, and a 2% rate of inflation in European countries that use the euro, and require a 3% real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:

Which of the following theories suggests that the percentage change in spot exchange rate of a currency should be equal to the inflation differential between two countries?

According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.

The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be

Assume that the one-year interest rate in the U.S. is 7% and in the U.K. is 5%. According to the international Fisher effect, British pound's spot exchange rate should ____ by about ____ over the year.

Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.

The Fisher effect is used to determine the:

If the IFE theory holds, that means that covered interest arbitrage is not feasible.

If the international Fisher effect (IFE) holds, the local investors are expected to earn the same return from investing internationally as they would from investing in their local markets.

Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:

If purchasing power parity holds, then the Fisher effect must also hold.

Because there are sometimes no substitutes for traded goods, this will:

According to the international Fisher effect (IFE) :

Assume that the U.S. inflation rate is higher than the New Zealand inflation rate. This will cause U.S. consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the U.S. According to purchasing power parity (PPP) , this will result in a(n) ____ of the New Zealand dollar (NZ$) .

The interest rate in the U.K. is 7%, while the interest rate in the U.S. is 5%. The spot rate for the British pound is $1.50. According to the international Fisher effect (IFE) , the British pound should adjust to a new level of:

Which of the following theories suggests that the percentage difference between the forward rate and the spot rate depends on the interest rate differential between two countries?

Assume that the interest rate offered on pounds is 5% and the pound is expected to depreciate by 1.5%. For the international Fisher effect (IFE) to hold between the U.K. and the U.S., the U.S. interest rate should be ____.