Author Question: Suppose the interest parity condition holds. Also assume that the one-year interest rate in the ... (Read 435 times)

LCritchfi · **on:** Jun 30, 2018

Suppose the interest parity condition holds. Also assume that the one-year interest rate in the United States is 6 and that the one-year interest rate in Canada is 5. What does this imply about the current versus future expected exchange rate (for the U.S. and Canadian dollars)? Explain.

What will be an ideal response?

Question 2

For this question, assume that the Phillips curve equation is represented by the following equation: t - t-1 = (m + z) - ut. Given this information, the natural rate of unemployment will be equal to

A) m + z.
B) (m + z - ).
C) (m + z).
D) 0.
E) none of the above

jxjsniuniu · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

If the interest rate in US is greater than the interest rate in Canada, we know that Canadian dollars must be expected to appreciate to equate the expected returns on the two bonds.

Answer to Question 2

E