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Suppose that the exchange rate adjusts so that interest-rate parity holds. Suppose also that the interest rate on a one-year German bond is 7% and the interest rate on a one-year U.S. bond is 4%.

A- Suppose that you expect the exchange rate in one year to be 1.2 dollars per euro. What is the exchange rate today?

B- Suppose that relative purchasing-power parity holds and that the inflation rate in Germany is expected to be 2% over the next year. What is the expected inflation rate in the United States?

International Economics, Economics

  • Category:- International Economics
  • Reference No.:- M9495315

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