Question

These questions refer to Purchasing Power Parity.

According to Interest Rate Parity, how would the dollar respond (appreciate, depreciate, no change) against the Euro in reaction to an average European inflation rate of 2.2%? The US inflation rate is 4% in this example—the term in question is 1 year. Please use this data for a and b and c.

A. Consider the relationship between expansionary monetary policy. the value of the dollar, and net imports. How does this new dollar value impact net exports?  Do these two work with each other in regards to economic growth? Explain.

C. Suppose the current exchange rate is $1 buys .8774Euro, and key interest rates in the US are at 1% while they are at 3.25% in Europe. If my stock in the European stock market rises by 20%, what movement would need to occur to cause me to lose money on my transaction (when accounted for in dollars—the term in question is 1 year)? If the US Federal Reserve raises interest rates, how would you expect the Euro to move (appreciate or depreciate)?

Answer 1

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