16.1 Briefly discuss the evidence for or against PPP.

• Does it always hold?
• Why might it fail?

16.2 Every week the Fed announces how fast the money supply grew in the last 10 days. Economists noticed that when the announced data was larger than expected, nominal interest rates RISE. There are two possible reasons: 1. unexpectedly high money growth raises expected inflation and hence R (Fischer effect) or 2. unexpectedly high money growth makes people think the Fed will tighten to reign in money growth, leading to a decrease in the money supply level. How can you use foreign exchange data to see which is right ?