Chapter 8—Relationships among Inflation, Interest Rates, and Exchange Rates1.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: APTS:12.Given a home country and a foreign country, purchasing power parity (PPP) suggests that:3.The international Fisher effect (IFE) suggests that:4.Because there are a variety of factors in addition to inflation that affect exchange rates, this will: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 CANS: APTS:1
6.According to the IFE, if British interest rates exceed U.S. interest rates:
