Suppose the exchange rate adjusts so that interest-rate parity holds.Also assume that the interest rate on a one-year Canadian bond is 3 percent and the interest rate on a one-year U.S.bond is 5 percent.

a.If the exchange rate today is 1.40 Canadian dollars per U.S.dollar, what do you expect the exchange rate to be one year from now?
b.Suppose relative purchasing-power parity holds, and the inflation rate in Canada is expected to be 1 percent over the next year.What is the expected inflation rate in the United States?

Question

Suppose the exchange rate adjusts so that interest-rate parity holds.Also assume that the interest rate on a one-year Canadian bond is 3 percent and the interest rate on a one-year U.S.bond is 5 percent.

a.If the exchange rate today is 1.40 Canadian dollars per U.S.dollar, what do you expect the exchange rate to be one year from now?
b.Suppose relative purchasing-power parity holds, and the inflation rate in Canada is expected to be 1 percent over the next year.What is the expected inflation rate in the United States?

Quizplus · Accepted Answer

The Answer of Suppose the exchange rate adjusts so that interest-rate parity holds.Also assume that the interest rate on a one-year Canadian bond is 3 percent and the interest rate on a one-year U.S.bond is 5 percent.

a.If the exchange rate today is 1.40 Canadian dollars per U.S.dollar, what do you expect the exchange rate to be one year from now?
b.Suppose relative purchasing-power parity holds, and the inflation rate in Canada is expected to be 1 percent over the next year.What is the expected inflation rate in the United States?

Suppose the Exchange Rate Adjusts So That Interest-Rate Parity Holds