PPP and Changes in the Real Interest Rate Assume that you believe exchange rate movements are mostly driven by purchasing power parity. The United States and Canada presently have the same nominal (quoted) interest rate. The central bank of Canada just made an announcement that causes you to revise your estimate of Canada’s real interest rate downward. Nominal interest rates were not affected by the announcement. Do you expect that the Canadian dollar to appreciate, depreciate, or remain the same against the dollar in response to the announcement? Briefly explain your answer.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 8, Problem 43QA
Textbook Problem

PPP and Changes in the Real Interest Rate Assume that you believe exchange rate movements are mostly driven by purchasing power parity. The United States and Canada presently have the same nominal (quoted) interest rate. The central bank of Canada just made an announcement that causes you to revise your estimate of Canada’s real interest rate downward. Nominal interest rates were not affected by the announcement. Do you expect that the Canadian dollar to appreciate, depreciate, or remain the same against the dollar in response to the announcement? Briefly explain your answer.

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