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

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

​According to the IFE, if British interest rates exceed U.S. interest rates:

​According to the international Fisher effect, if Venezuela has a much higher nominal interest rate than other countries, its inflation rate will likely be ____ than other countries, and its currency will ____.

The inflation rate in the United States is 4 percent, while the inflation rate in Japan is 1.5 percent. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen have adjusted according to purchasing power parity, the new exchange rate for the yen will be:

The international Fisher effect (IFE) suggests that the currencies with relatively high interest rates will appreciate because those high rates will attract investment and increase the demand for that currency.

The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation.

Among the reasons that purchasing power parity (PPP) does not consistently occur are:

​According to the international Fisher effect (IFE):

Brazil has a very high interest rate. According to _____, the Brazilian real should depreciate substantially.

​The Fisher effect is used to determine the:

Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:

​Assume that the U.S. and Chile nominal interest rates are equal. Then, the U.S. nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the dollar.

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

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.

​The international Fisher effect (IFE) suggests that the foreign currency will appreciate when:

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

Assume that U.S. and British investors require a real return of 2 percent. If the nominal U.S. interest rate is 15 percent, and the nominal British rate is 13 percent, then according to the IFE, the British inflation rate is expected to be about ____ the U.S. inflation rate, and the British pound is expected to ____.

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

​Latin American countries have historically experienced relatively high inflation, and their currencies have weakened. This information is somewhat consistent with the concept of: