a) If a country has exhibited a lower inflation than its major trading partner country, how would you expect this to affect the currency value for that country with respect to its trading partner? Why may this expected relationship not always occur? b) Assume that the inflation rate in India is expected to increase substantially. How will this affect India’s nominal interest rates and the value of Indian rupee (INR)? If the International Fisher Effect (IFE) holds, how will the nominal return to the U.S. institutional investors investing in Indian financial markets be affected by the higher inflation in India? Explain. c) Explain why the high inflation in India may lead to severe pressure on the INR.

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Answered: a) If a country has exhibited a lower…

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter11: Foreign Exchange, Trade, And Bubbles

Section: Chapter Questions

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a) If a country has exhibited a lower inflation than its major trading partner country, how would you expect this to affect the currency value for that country with respect to its trading partner? Why may this expected relationship not always occur?

b) Assume that the inflation rate in India is expected to increase substantially. How will this affect India’s nominal interest rates and the value of Indian rupee (INR)? If the International Fisher Effect (IFE) holds, how will the nominal return to the U.S. institutional investors investing in Indian financial markets be affected by the higher inflation in India? Explain.

c) Explain why the high inflation in India may lead to severe pressure on the INR.

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