Question

1. Assume a two-country world: Country A and Country B. Which of the following is correct about purchasing power parity (PPP) as related to these two countries? Justify your answer (1 point)

1. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.
2. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will weaken.
3. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will strengthen.
4. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will weaken.

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According to the IFE, if British interest rates exceed U.S. interest rates: Justify your answer (1 point) a. The British pound's value will remain constant. b. The British pound will depreciate against the dollar. c. The British inflation rate will decrease. d. The forward rate of the British pound will contain a premium. e. Today’s forward rate of the British pound will equal today's spot rate. ------------------------------------------------------------------------------------------------------------------------------------- If nominal British interest rates are 3% and nominal U.S. interest rates are 6%, then the British pound (£) is expected to increase or decrease by about what percent, according to the international Fisher effect (IFE). Show working to justify your answer (2 points) a.          depreciate; 2.83 b.         appreciate; 2.83 c.          depreciate; 1.0 d.         appreciate; 1.0 e.          none of the above ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A job in Milan which pays € 55,000 a year. A job in Boston which pays $64,000 a year. The exchange rate were £1= $1.42 and   £1= €1.25. Which job offer has the highest salary? Show working to explain your answer. (2 points)

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Answer 1

1.
If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will weaken.

Higher inflation rate country experiences weakening of currency

2.
The British pound will depreciate against the dollar
Higher interest rate country experiences depreciation in currency

3.
% change in pounds/dollar=1*(1+6%)/(1+3%)-1=2.91262%

Dollar will appreciate by 2.93%
Pound will depreciate by 2.83%
depreciate; 2.83

4.
Milan=55000*1/1.25=44000.00 pounds
Boston=64000/1.42=45070.4225 pounds

Boston has highest salary