Which of the following is true? The PPP (purchasing power parity) suggests that the inflation...

Which of the following is true?

       The PPP (purchasing power parity) suggests that the inflation rate differential reflects the expected change in the exchange rate.
       The FEP (forward expectation parity) suggests that the nominal interest rate differential reflects the expected change in the exchange rate.
       The IRP (interest rate parity) suggests that the nominal interest rate differential reflects the expected change in the exchange rate.
       The IFE (international fisher effect) states that any forward premium or discount is equal to the change in the exchange rate.
       None of the above.

Solutions

Expert Solution

* The PPP (purchasing power parity) suggests that the inflation rate differential reflects the expected change in the exchange rate.

-- This theory states that the exchange rate between currencies of two countries should be equal to the ratio of the country's price levels.

* The FEP (forward expectation parity) suggests that the nominal interest rate differential reflects the expected change in the exchange rate.

-- States that any forward premium or discount is equal to the expected change in the exchange rate.

* The IFE (international fisher effect) states that any forward premium or discount is equal to the 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 of the country.

Ans:

* The IRP (interest rate parity) suggests that the nominal interest rate differential reflects the expected change in the exchange rate.

-- Interest rate parity is a theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.

jeff jeffy answered 1 year ago

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