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You are told that the nominal interest rates in Country A is 14%, and the nominal...

You are told that the nominal interest rates in Country A is 14%, and the nominal interest rates in Country B is 8 %. Economists estimate that the real interest rate is 2% per year in both countries.

a) What would you expect inflation to be in Country A and Country B?

b) If the exchange rate adjusts to keep the real prices of goods the same in the two countries, how would the exchange rate between Country A and Country B adjust over time?

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