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

The inflation rate in the United States is 3 percent while the inflation rate in Japan is 10 percent. The current exchange rate for the Japanese yen (¥) is $0.0075. aFter supply and demand for the Japanese yen have adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

There is much evidence to suggest that Japanese investors invest in U.S. Treasury securities when U.S. interest rates are higher than Japanese interest rates. These investors most likely believe in the international Fisher effect.

If the international Fisher effect (IFE) did not hold based on historical data, this would suggest that:​

Which of the following theories can be assessed using data that exists at one specific point in time?

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

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

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

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

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.

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 United States. According to purchasing power parity (PPP), this will result in a(n) ____ of the New Zealand dollar (NZ$).

According to the international Fisher effect (IFE):

The nominal interest rate can be measured as the real interest rate minus the expected inflation rate.

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

Assume that the international Fisher effect (IFE) holds between the United States and the United Kingdom. The U.S. inflation is expected to be 5 percent, while British inflation is expected to be 3 percent. The interest rate offered on pounds is 7 percent, and the U.S. interest rate is 7 percent. What does this say about real interest rates expected by British investors?

Which of the following is not true regarding limitations of PPP and the IFE?

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

Which of the following is not true regarding IRP, PPP, and the IFE?

The following regression was conducted for the exchange rate of the British pound (BP): Regression results indicate that a₀ = 0 and a₁ = 2. Therefore,

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.