4. Answer: The U.S. inflation rate is expected to be 4 percent over the next year, while Eurozone inflation rate is expected to be 3 percent. The current spot rate of the euro is USD1.13. Using purchasing power parity, the expected EUR spot rate at the end of one year is USD A) 1.1187 B) 1.1356 C) 1.1413 D) none of the above 5. Answer: A foreign country has a higher relative nominal interest rate than does the home country. The International Fisher Effect suggests that A) The foreign country will have a higher relative inflation rate and its currency will be expected to appreciate relative to the home currency B) The foreign country will have a lower relative inflation rate and its currency will be expected to appreciate relative to the home currency C) That foreign country will have a higher inflation rate and its currency will be expected to depreciate relative to the home currency D) That foreign country will have a lower relative inflation rate and its currency wll be expected to depreciate relative to the home currency 6. Answer Assume at the start of the year that the Canadian dollar (CAD) spot rate is USD 0.90 and that Canadian and US. inflation rates are identical Suppose that over the year Canada experiences 5% inflation while the US. experiences 3% inflation. According to PPP, by year's end, the new spot value of the CAD will be A) 0.882 B) 0.915 C) 0.982 D) none of the above 7. Answer: Assume at the start of the year that the Australian dollar (AUD) spot rate is USD 0.75 and that Australian and US. one-year interest rates are both equal to 5%. Suppose Australian interest rates increase to 8% while U.S. interest rates remain unchanged. According to the International Fisher Effect, by year's end the spot value of the AUD will be A) the same as a year ago B) 0.7275 C) 0.7725 D) none of the above