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The interest rate
$ 15.00

1. The interest rate in Japan is 5% for 90 days, the current spot rate is $1.5/¥ and the forward rate is $1.45/¥. If the covered interest rate differential is about 1%, then the interest rate in the U.S. for 90 days would have to be: _________________ (Justify your answer)


2. Suppose that U.K. (home country) prices rise 5 percent over the next year while prices in Mexico rise 9%. According to the purchasing power parity theory of exchange rates, what should happen to the exchange rate between the pound and the peso? Justify your answer


3. Based on PPP (purchasing power parity) and the quantity theory of money, if Japan’s real income rises relative to real income in the US, there should be a(n): _________________ (justify your answer).

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