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

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 ____.

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 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.

The following regression was conducted for the exchange rate of the Cyprus pound (CYP): $e _ { B P } = a _ { 0 } + a _ { 1 } \left( \frac { \left( 1 + I _ { U S } \right) } { \left( 1 + I _ { B } \right) } - 1 \right) + \mu$ Regression results indicate that a₀ = 0 and a₁ = 2. Therefore,

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 ____.

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

The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be:

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

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:

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

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

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:

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

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

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

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 Fisher effect is used to determine the:

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.

According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries: