If purchasing power parity is holding, what will happen to the currency of a country with high inflation?
A. Currency will appreciate.
B. Currency will depreciate.
C. There will be no significant change in exchange rate.
D. Currency will sell at a forward premium.
68. Countries with high inflation will have the:
A. weakest currency.
B. highest nominal interest rate.
C. strongest currency.
D. highest real interest rate.
69. If exchange rates adjust to reflect inflation differentials across countries, then:
A. the law of one price will always hold.
B. no one will use forward currency markets.
C. interest rates will be equal across countries.
D. PPP is said to hold.
70. Predict the expected spot exchange rate between the Japanese yen and U.S. dollar, given that inflation in Japan, at 8%, is 4% higher than in the United States and that the current spot rate is ¥107/$.
71. The ratio of expected spot rate to current spot rate for $/£ is 1.02 and the inflation rate in the United States is 5%. What is the approximate inflation rate in the United Kingdom?
72. The international Fisher effect predicts that differences in nominal interest rates between countries reflect differences in:
A. real rates of interest.
B. purchasing power parity.
C. the standard of living.
D. expected inflation.
73. What do you expect to happen to prices in Japan, given nominal interest rates of 10% in the United States and 6% in Japan, and expected U.S. inflation of 6%?
A. Expected Japanese inflation is 1.79%.
B. Expected Japanese inflation is 2.15%.
C. Expected Japanese inflation is 6.22%.
D. Expected Japanese inflation is 10.00%.
74. How much would you expect to receive for a nominal interest rate in Holland if funds can be invested in the United States at a rate of 7% when inflation is expected to be 4% in the United States and 8% in Holland?
75. According to the theory of purchasing power parity, exchange rates will adjust so that differences in:
A. interest rates across countries are offset.
B. forward rates across countries are offset.
C. expected inflation across countries are offset.
D. international Fisher rates are offset.
76. What is the expected German inflation rate if 3% inflation is expected in the United States, the spot exchange rate is €1.5/$ and the expected spot rate is €1.6/$?
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