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Question
Suppose the exchange rate adjusts so that interest-rate parity holds. Also assume that the interest rate on a one-year Canadian bond is 3 percent and the interest rate on a one-year U.S. bond is 5 percent.a. If the exchange rate today is 1.40 Canadian dollars per U.S. dollar, what do you expect the exchange rate to be one year from now?
b. Suppose relative purchasing-power parity holds, and the inflation rate in Canada is expected to be 1 percent over the next year. What is the expected inflation rate in the United States?
Answer
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