FOR THEDUESTION (25 Points, 5 points each) 1. Assume that the inflation rate in

Question

FOR THEDUESTION (25 Points, 5 points each) 1. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the U.S. is 8%. According to PPP, the Singapore dollar should A) appreciate; 4.85 B) depreciate; 3,11 C) appreciate; 3.11 D) depreciate; 4.85 by. 2. Assume that the one-year interest rate in the US, is 7% and in the UK is 5%. According to the international Fisher effect, British pound's spot exchange rate should A) depreciate; 1.9% B) appreciate: 1.9% C) depreciate: 3.94% D) appreciate: 3.94% by about over the year

Explanation / Answer

1. (A) option is correct- Singapore dollar will appreciate by 4.85% ((1+.08)/(1.03) -1) as per PPP theory.

2. (B) option is correct- British poung spot exchange rate should appreciate by about 1.9% ((1.07)/(1.05)-1) over the year as per international fisher effect. US with higher interest rate will have higher inflation as compared with UK.

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