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Chapter 8—Relationships among Inflation, Interest Rates, and Exchange Rates
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?
a. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will
weaken.
b. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will
weaken.
c. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will
strengthen.
d. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will
weaken.
ANS: A PTS: 1
2. Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
PTS: 1
3. The international Fisher effect (IFE) suggests that:
PTS: 1
4. Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
PTS: 1
5. Because there are sometimes no substitutes for traded goods, this will:
a. reduce the probability that PPP shall hold.
b. increase the probability that PPP shall hold.
c. increase the probability the IFE will hold.
d. B and C
ANS: A PTS: 1

6. According to the IFE, if British interest rates exceed U.S. interest rates:
PTS: 1