From our discussion of the Fisher effect in Chapter 5 , we know that the actual relationship

Question:

From our discussion of the in Chapter 5 , we know that the actual relationship between a nominal rate, R , a real rate, r , and an inflation rate, h , can be written as:
1 + r = (1 + R) / (1 + h)
This is the domestic What is the nonapproximate form of the international Based on your answer in (a), what is the exact form for UIP? Recall the exact form of IRP and use UFR.
c. What is the exact form for relative PPP?
d. Recalculate the NPV for the Kihlstrom drill bit project (discussed in Section 20.5 ) using the exact forms for the UIP and the international Verify that you get precisely the same answer either way.
Fisher Effect
The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest...