Question 16 2.85 pts The International Fisher Effect suggests that any forward premium or discount is equal to the expected change in the exchange rate. an increase (decrease) in the expected inflation rate in a country will cause a proportionate increase (decrease) in the interest rate in the country. any forward premium or discount is equal to the actual change in the exchange rate. the nominal interest rate differential reflects the expected change in the exchange rate.
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Which one of the following statements is CORRECT?Select one:A.Using the interest parity equation and assuming that the expected exchange rate changes, a relationship between the domestic interest rate and the nominal exchange rate can be derived.B.The interest parity condition relation tells us that the exchange rate depends on the domestic interest rate, the foreign interest rate and the expected future inflation rate.C.According to the interest parity relation, a higher domestic interest rate leads to a depreciation of the nominal exchange rate.D.The interest parity condition relation E = (1+i/1+i*)Ēe tells us that an increase in the foreign interest rate leads to a decrease in the exchange rate.
Jennifer S.
The three-month dollar interest rate in New York is 3.80% per annum. Alternatively, the three-month euro interest rate in Frankfurt is 5.40% p.a. The current $/€ spot exchange rate is $1.1220/€. The euro three-month forward rate is quoted at $1.1210/€. Use the International Fisher Effect (IFE) to find what should be the expected three-month spot exchange rate of dollars against the euro (If not performing chain calculations, use interest rates up to four decimal places, and again use the proper relationship that describes IFE). Assume that the real rate of interest in both the euro zone and the U.S. is 1.96% per annum; use the Fisher Effect (FE) to calculate the expected annualized three-month rates of inflation in the euro zone and the U.S. (Expressed as a % p.a. up to four decimal places). Use the results in question above and the Relative Purchasing Power Parity (RPPP) relationship to estimate the expected three-month spot exchange rate of the dollars against the euro. What do you notice about the answers to questions 2, 3, and 5? Are they what you expect? I need to know how to get those answers. Show me in detail.
Adi S.
20) Assume that the current exchange rate between the U.K. pound and the U.S. dollar is 2 (E = 2.0). If interest parity holds, and the U.S. interest rate is 6% while the U.K. interest rate is 8%, the expected exchange rate in one year is: A) 1.98. B) 1.99. C) 2.01. D) 2.02. E) 2.04. 18) Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a higher level. This is called: A) a revaluation. B) a devaluation. C) a depreciation. D) an appreciation. 4) Assume that the interest parity condition holds. Also assume that the U.S. interest rate is 6% while the U.K. interest rate is 8%. Given this information, financial markets expect the pound to: A) appreciate by 6%. B) appreciate by 2%. C) depreciate by 14%. D) depreciate by 2%. E) appreciate by 4%. 17) In an open economy under flexible exchange rates, an increase in the interest rate will cause an increase in which of the following? A) the exchange rate, E B) net exports C) investment D) all of the above E) none of the above.
Shu N.
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