Author Question: Assuming that the interest parity condition holds, what type of information is contained in interest ... (Read 46 times)

corkyiscool3328 · **on:** Jun 30, 2018

Assuming that the interest parity condition holds, what type of information is contained in interest rate differentials between domestic and foreign bonds? Explain.

What will be an ideal response?

Question 2

For this question, assume that individuals form expectations of inflation according to the following equation et = t-1. From 1970 on, the value of for this equation

A) increased over time and approached 1.
B) decreased over time and approached zero.
C) remained constant at zero.
D) remained constant at negative one.
E) none of the above

sokh · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Given that the domestic rate equals the foreign interest rate minus any expected rate of appreciation of the domestic currency, any difference in interest rates will reflect this expected depreciation/appreciation of the domestic currency.

Answer to Question 2

A