Suppose the interest parity condition holds and that the domestic interest rate is less than the foreign interest rate. What does this imply about the current versus future expected exchange rate? Explain.
What will be an ideal response?
Question 2
For this question, assume that the expected rate of inflation is a function of past year's inflation. Also assume that the unemployment rate has greater than the natural rate of unemployment for a number of years. Given this information, we know that
A) the rate of inflation will approximately be equal to zero.
B) the rate of inflation should neither increase nor decrease.
C) the rate of inflation should steadily increase over time.
D) the rate of inflation should steadily decrease.
E) the inflation rate will be approximately equal to the natural rate of unemployment.
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