Question

The real interest rates and real exchanges rates are constant and equal in Germany and Turkey. The Fisher equation and purchasing power parity hold in both countries. If the nominal interest rate is 8 percent in Germany and 10 percent in Turkey, do you expect Germany’s nominal exchange rate to appreciate, depreciate, or remain the same? Explain.

Answer 1

SOLTION:-

* If nominal interest rates is 10% in south country means inflation is more in south than in north so people from north will find it better to invest in south earn higher monetary value and than adjust for lower inflation in north.

* So demand for south currency will increase in relation to north currncy because people will demand south currency to invest their so north currency will depreciate.

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