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QUESTION 1: The rationale behind PPP is that: 1. Inflation and interest rate have positive relation....

QUESTION 1:
The rationale behind PPP is that:
1. Inflation and interest rate have positive relation.
2. Interest rate increases make local currency stronger in the future
3. Interest rate increases make local currency weaker in the future
4. Interest rate increases make local currency weaker in forward market
5. Interest rate increases make local currency stronger in forward market
6. Higher inflation makes local currency weaker in the future
7. Higher inflation makes local currency stronger in the future
8. Higher inflation makes local currency weaker in forward market
9. Inflation makes local currency stronger in forward market

Type the number of correct choice below.



QUESTION 2:
The rationale behind IFE is that:
1. Inflation and interest rate have positive relation.
2. Interest rate increases make local currency stronger in the future
3. Interest rate increases make local currency weaker in the future
4. Interest rate increases make local currency weaker in forward market
5. Interest rate increases make local currency stronger in forward market
6. Higher inflation makes local currency weaker in the future
7. Higher inflation makes local currency stronger in the future
8. Higher inflation makes local currency weaker in forward market
9. Inflation makes local currency stronger in forward market

Type the number of correct choice below.

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Answer #1

Q.1 (6) PPP shows the relation in inflation and exchange rate. if in a country inflation rate rises relative to another country than it leads to decline export and increase in import that depresses the local country currency in the future market.

Q.2 (3) IFE shows the relation in interest and exchange rate. if in a country interest rate rises relative to another country depress the local country currency in the future market because higher interest rates reflect the higher inflation.

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