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

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

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?

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.

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

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.

Which of the following is indicated by research regarding purchasing power parity (PPP)?

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

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

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

Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should ____ by ____%.

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

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

Assume that inflation in the U.S. is expected to be 9%, while inflation in Australia is expected to be 5% over the next year. Today you receive an offer to purchase a one-year put option for $.03 per unit on Australian dollars at a strike price of $0.72. Today the Australian dollar is quoted at $0.70. You believe that purchasing power parity holds. You should accept the offer.

Assume that the U.S. one-year interest rate is 3% and the one-year interest rate on Australian dollars is 6%. The U.S. expected annual inflation is 5%, while the Australian inflation is expected to be 7%. You have $100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of an Australian dollar is $0.689. What will be the yield on your investment if you invest in the Australian market?

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

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

Assume that the New Zealand inflation rate is higher than the U.S. 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 following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: $e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$ Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

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.

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