Question 1

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

Accepted Answer

According to purchasing power parity, the future spot exchange rate is influenced by the inflation differential between two countries. This means that if one country has a higher rate of inflation than another, then its currency should depreciate in value against the other country's currency to maintain parity in purchasing power. Therefore, the correct answer is option C (the inflation differential).

Question 2

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

Accepted Answer

If the inflation rate in New Zealand is higher than in the U.S., the prices of goods and services in New Zealand would increase faster than in the U.S. This would lead to a decrease in demand for imports from New Zealand by U.S. consumers, as they become more expensive, and an increase in demand for imports from the U.S. by New Zealand consumers, as they become relatively cheaper. This would result in a depreciation of the New Zealand dollar (NZ$) according to the purchasing power parity (PPP) theory. Therefore, the correct answer is C.

Question 3

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

Accepted Answer

If the IFE does not hold, it implies that the difference in interest rates between two countries does not accurately predict future exchange rate movements, allowing for potentially higher profits from foreign investments.

Question 4

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

Accepted Answer

The regression results indicate that the coefficient for the lag of the exchange rate (a₀) is not significant (0), but the coefficient for the lag of the inflation differential (a₁) is significant (2). This suggests that the exchange rate change was primarily driven by the inflation differential between the UK and another country. As a result, purchasing power parity (PPP) is likely to have underestimated the exchange rate change during the period under examination. Therefore, the correct answer is C. It is not possible to determine whether PPP will overestimate or underestimate the exchange rate change in the future based on this regression.

Question 5

​According to the international Fisher effect, if U.S. investors expect a 5 percent rate of domestic inflation over one year and a 2 percent rate of inflation in European countries that use the euro, and if they require a 3 percent real return on investments over one year, the nominal interest rate on one-year U.S. Treasury securities would be:

Accepted Answer

According to the international Fisher effect, the nominal interest rate in a country is equal to the sum of the real interest rate and the expected inflation rate in that country. In this case, the U.S. nominal interest rate would be:

3% + 5% = 8%

Therefore, the correct answer is E, 8 percent.

Question 6

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:

Accepted Answer

According to the international Fisher effect, the differential in nominal interest rates between any two countries is due to their inflation differentials. If investors in all countries require the same real rate of return, then the nominal interest rates in a country will adjust to compensate for the expected inflation rate. Therefore, the difference in nominal interest rates between two countries reflects the difference in their expected inflation rates.

Question 7

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

Accepted Answer

Purchasing power parity (PPP) theory suggests that in the long run, exchange rates should adjust to equalize the price of identical goods and services in any two countries. It does not imply that inflation rates or nominal interest rates between two countries will be the same.

Question 8

Which of the following is true regarding the IFE?

Accepted Answer

All of the given statements are true regarding the International Fisher Effect (IFE). The results of testing the IFE will vary based on the specific time frame and currency that are tested. The IFE relies on the Purchasing Power Parity (PPP) relationship between inflation and exchange rates, which can be subject to errors. And, in general, exchange rate movements of most currencies frequently exhibit substantial deviations from what the IFE would predict.

Question 9

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

Accepted Answer

Purchasing Power Parity (PPP) theory suggests that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries. Therefore, if the home country's inflation rate is higher than that of the foreign country, the home currency will depreciate to restore the purchasing power parity. This means the home currency will lose value compared to the foreign currency because goods and services in the home country become relatively more expensive than in the foreign country.

Question 10

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

Accepted Answer

PPP assumes that inflation is the only factor affecting exchange rates. As there are other factors at play, PPP is less likely to hold.

Question 11

​Assume that the one-year interest rate in the United States is 7 percent and in the United Kingdom is 5 percent. According to the international Fisher effect, the British pound's spot exchange rate should ____ by about ____ over the year.

Accepted Answer

The answer of ​Assume that the one-year interest rate in...

Question 12

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

Accepted Answer

According to the International Fisher Effect (IFE), the difference in nominal interest rates between two countries is equal to the expected change in exchange rates. If the UK interest rate is 5% and the pound is expected to depreciate by 1.5%, the US interest rate should be approximately 3.5% (5% - 1.5%). The closest option is 3.43%.

Question 13

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

Accepted Answer

The fact that a₀ = 0 and a₁ = 1 indicates that the regression analysis supports purchasing power parity (PPP), which states that the exchange rate between two currencies should adjust over time to reflect changes in relative inflation rates. Therefore, choice A is correct: purchasing power parity holds. This result does not provide information about whether PPP overestimated or underestimated the exchange rate change during the period examined, or about future exchange rate changes.

Question 14

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

Accepted Answer

The international Fisher effect suggests that a country with a higher nominal interest rate than another will have a higher expected inflation rate, leading to a depreciation or weakening of its currency relative to the other country's currency.

Question 15

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

Accepted Answer

The fact that there are sometimes no substitutes for traded goods means that their prices are less likely to be affected by exchange rate fluctuations, making it less likely for PPP (Purchasing Power Parity) to hold.

Question 16

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

Accepted Answer

The International Fisher Effect (IFE) theory suggests that the percentage change in the spot exchange rate of a currency should be equal to the interest rate differential between two countries.

Question 17

​Assume that the U.S. one-year interest rate is 5 percent and the one-year interest rate on euros is 8 percent. You have $100,000 to invest and you believe that the international Fisher effect (IFE) holds. The euro's spot exchange rate is $1.40. What will be the yield on your investment if you invest in euros?

Accepted Answer

The answer of ​Assume that the U.S. one-year interest rate...

Question 18

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

Accepted Answer

The International Fisher Effect (IFE) theory suggests that the currency of the country with the lower nominal interest rate will appreciate against the currency of the country with the higher nominal interest rate. In this case, since the UK has a lower interest rate (3%) compared to the US (6%), the British pound (£) is expected to appreciate. The expected appreciation rate can be calculated using the formula: [(1 + foreign interest rate) / (1 + domestic interest rate)] - 1. Plugging in the given interest rates: [(1 + 0.06) / (1 + 0.03)] - 1 = 0.029126... or approximately 2.9%.

Question 19

​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?

Accepted Answer

Purchasing power parity (PPP) theory suggests that the percentage change in the spot exchange rate of a currency should be equal to the inflation differential between two countries. This means that if one country has a higher inflation rate than another, its currency should depreciate relative to the other country's currency to maintain the same purchasing power.

Quiz 8: Relationships Among Inflation, Interest Rates, and Exchange Rates

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

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

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

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:

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

Which of the following is true regarding the IFE?

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

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

Assume that the one-year interest rate in the United States is 7 percent and in the United Kingdom is 5 percent. According to the international Fisher effect, the British pound's spot exchange rate should by about over the year.

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

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

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

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

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

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

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?

Quiz 8: Relationships Among Inflation, Interest Rates, and Exchange Rates

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

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

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

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:

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

Which of the following is true regarding the IFE?

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

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

​Assume that the one-year interest rate in the United States is 7 percent and in the United Kingdom is 5 percent. According to the international Fisher effect, the British pound's spot exchange rate should ____ by about ____ over the year.

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

​The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a0 = 0 and a1 = 1. Therefore:

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

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

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

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

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

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

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

Assume that the one-year interest rate in the United States is 7 percent and in the United Kingdom is 5 percent. According to the international Fisher effect, the British pound's spot exchange rate should by about over the year.

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound: Regression results indicate that a₀ = 0 and a₁ = 1. Therefore:

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

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

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?