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

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.

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

Assume that U.S.and British investors require a real return of 2%.  If the nominal U.S.interest rate is 15%,and the nominal British rate is 13%,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 _______.

If the international Fisher effect (IFE)did not hold based on historical data,then this suggests that:

If interest rate parity holds,then the one-year forward rate of a currency will ______ the predicted spot rate of the currency in one year according to the international Fisher effect.

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

Assume U.S.and Swiss investors require a real rate of return of 3%.  Assume the nominal U.S.interest rate is 6% and the nominal Swiss rate is 4%.  According to the international Fisher effect,the franc will _______ by about _______.

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that = 0 and .Therefore:

You have an opportunity to invest in Australia at an interest rate of 8%.Moreover,you expect the Australian dollar (A$)to appreciate by 2%.Your effective return from this investment is:

If interest rate parity holds,then the international Fisher effect must hold.

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 oneyear U.S.Treasury securities would be:

Because there are a variety of factors in addition to inflation that affect exchange rates,this will:

Interest rate parity can only hold if purchasing power parity holds.

If nominal British interest rates are 3% and nominal U.S.interest rates are 6%,then the British pound (£)is expected to ____________ by about _________%,according to the international Fisher effect (IFE).

The relative form of purchasing power parity (PPP)accounts for the possibility of market imperfections such as transportation costs,tariffs,and quotas in establishing a relationship between inflation rates and exchange rate changes.

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

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

The international Fisher effect (IFE)suggests that:

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.

If interest rates on the euro are consistently below U.S.interest rates,then for the international Fisher effect (IFE)to hold: