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Tutorial+7

# Tutorial+7 - ECO2004S TUTORIAL 7 Question 1 Given the...

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ECO2004S TUTORIAL 7 Question 1: Given the nominal exchange rate between the rand and the dollar at time t, E t,R/\$ , show that the uncovered interest rate parity condition: (1+i t SA )=[(1+i t US )E e t+1,R/\$ ]/E t,R/\$ Is approximately equal to: i t SA ≈ i t US + [(E e t+1,R/\$ - E t,R/\$ )]/E t,R/\$ Where i t SA , i t US and E e t+1,R/\$ denote the nominal interest rate in South Africa, the nominal interest rate in US and the expected nominal rand-dollar exchange rate at time t+1, respectively. Question 2: Given that the purchasing power parity holds between the rand and the dollar, using the following facts: (1+i t SA )=[(1+i t US )E e t+1,\$/R ]/E t,\$/R Uncovered interest rate parity condition Π e t,SA = (P e t+1,SA – P t, SA )/P t,SA Expected inflation rate in SA Π e t,US = (P e t+1,US – P t, US )/P t,US Expected inflation rate in US Show that the uncovered interest parity condition approximates to: i t SA - Π e t,SA ≈ i t US - Π e t,US (Fisher Equation) Where i t SA , i t US , E t,R/\$ and E e t+1,R/\$

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Tutorial+7 - ECO2004S TUTORIAL 7 Question 1 Given the...

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