ECON 160B international macroeconomics

Interest Rate and Purchasing Power Parities Suppose that the following conditions all hold: uncovered and covered interest rate parity (no risk premium), real interest rate parity, relative and absolute purchasing power parity. And suppose you read the following information in the newspaper: - The current spot exchange rate between Turkey and Russia is 0.16 (Turkish Lira / Russian Ruble). - The current nominal interest rate for a one-year deposit in a Turkish bank is 25% (0.25). - The current nominal interest rate for a one-year deposit in a Russian bank is 8% (0.08). - The Russian national bank credibly commits itself to keep inflation at the level of 4% for the next year. For each of the following variables, compute the value implied by the information above. Show your work in each case and name which parity conditions you are using. (To keep your computations simple, use the approximated versions of UIP and CIP presented in class.)

a) expected future spot exchange rate for one year in the future (Turkish Lira / Russian Ruble).

b) the one-year forward exchange rate (Turkish Lira / Russian Ruble).

c) expected inflation in Turkey for the year.

d) the real interest rate in Turkey for the year.

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