1.

Assume the interest rate is 4% in the US and 3% in Euroland.

Which of the following statements about UIP are correct?

UIP will never hold for these numbers.

UIP predicts that the dollar is expected to appreciate by 1%.

UIP predicts that the dollar is expected to depreciate by 1%

If the expected rate of depreciation of the dollar is 1%, then UIP holds.

2.

The Fisher effect, named after economist Irving Fisher (1867-1947) is the one of the following:

Choose the one statement that is correct.

Price levels will change in tandem with the expected inflation rate.

Exchange rates will change in tandem with the expected inflation rate.

Real interest rates will change in tandem with the expected inflation rate.

Nominal interest rates will change in tandem with the expected inflation rate.

3.

he following statements pertains to real interest parity.

Choose the one statement that is correct.

If PPP holds, then arbitrage in goods markets results in an equalization of expected real interest rates across economies.

If UIP holds, then arbitrage in financial markets results in an equalization of expected real interest rates across economies.

If PPP and UIP hold, then arbitrage in goods markets and financialmarkets results in an equalization of expected nominal interest rates across economies.

If PPP and UIP hold, then arbitrage in goods markets and financialmarkets results in an equalization of expected real interest rates across economies.

4.

How was Italy able to reduce its inflation rate from 20-25% in the 1970s to under 5% in the 1990s?

Choose the one answer that is correct.

Italy targeted its money supply and used the money supply growth as a nominal anchor.

Italy targeted its inflation & interest rate and used the nominal interest rate as a nominal anchor.

Italy targeted its exchange rate and used its rate of depreciation against the US dollar as a nominal anchor.

Italy targeted its exchange rate and used its rate of depreciation against the German Mark as a nominal anchor.

5. Assume a country is targeting its exchange rate to the US dollar. If the inflation target is 6% and the US inflation rate is 3%, then the target rate of depreciation against the dollar is