PARIDAD DEL PODER ADQUISITIVO

Assume that the inflation rate in Barbados is 3.20%, while the inflation rate in the
U.S. is 3.00%. According to PPP, the Barbados dollar (BBD) should _______ by
_______%.
A) appreciate; 0.1938%
B) depreciate; 0.1938%
C) appreciate; 0.1942%
D) depreciate; 0.1942%

ef = [(1 + ih) / (1 + if)] – 1

ANSWER: B

SOLUTION: (1.03/1.032) – 1 = –.1938%.

The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 1.3%. The
current exchange rate for the Japanese yen (¥) is $0.0075. After supply and
demand for the Japanese yen has adjusted in the manner suggested by
purchasing power parity, the new exchange rate for the yen will be:
A) $0.0076.
B) $0.0075.
C) $0.0074.
D) $0.0131.
E) none of these.

ANSWER: A

SOLUTION: (1.03/1.013) × $.0075 = $.0076

EFECTO FISHER INTERNACIONAL

Nominal interest rates in Cyprus are 7%, while nominal interest rates in the U.S.
are 5%. The spot rate for the Cyprus pound (CYP) is $1.50. According to the
international Fisher effect (IFE), the Cyprus pound should adjust to a new level of:
A) $1.47.
B) $1.53.
C) $1.43.
D) $1.57.

ef = [(1 + Ih) / (1 + If)] – 1

ANSWER: A

SOLUTION: (1.05/1.07) × (1.50) = $1.47.

1
If nominal British interest rates are 3% and nominal U.S. interest rates are 6%,
then the British pound (£) is expected to _______ by about _______%, according
to the international Fisher effect (IFE).
A) depreciate; 2.9
B) appreciate; 2.9
C) depreciate; 1.0
D) appreciate; 1.0
E) none of these

ANSWER: B

SOLUTION: (1.06/1.03) – 1 = 2.9%.

OTROS

You have an opportunity to invest in Australia at an interest rate of 8%. Moreover,

you expect the Australian dollar (A$) to appreciate by 2%. Your effective return
from this investment is:
A) 8.00%.
B) 6.00%.
C) 10.16%.
D) 5.88%.

R effective = [(1 + I)(1 + ef)] - 1

ANSWER: C

SOLUTION: (1.08 × 1.02) – 1 = 10.16%.