Assume that U.S. and Argentine investors require a real return of 2 percent. If

Question

Assume that U.S. and Argentine investors require a real return of 2 percent. If the U.S. nominal interest rate is 5 percent, and Argentina's nominral interest rate is 7 percent, then according to the IFE, the Argentine inflation rate is expected to be about the U.S. inflation rate, and the Argentine peso is expected to O O (e) O O a. 3 percentage points below; appreciate by about 3 percent b. 3 percentage points below; depreciate by about 3 percent c. 2 percentage points above; depreciate by about 2 percent d. 3 percentage points above; depreciate by about 3 percent e. 2 percentage points below; appreciate by about 2 percent

Explanation / Answer

Correct option is > 2 percentage points above; depreciate about 2 percent

Roughly;

Inflation rate = Nominal rate - Real rate

US inflation rate = 5%-2% =3%

Argentina inflation rate = 7%-2% = 5%

Argentina inflation is above US by 2% and this implies its pesos or currency will depreciate by 2% with respect to USD

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