4. Topic: International Fisher Effect (IFE) A. Assume that the Canadian dollar's spot rate is $0.85 and that the Canadian and U.S. inflation rates are similar. Then assume that Canada experiences 4 percent inflation, whereas the United States experiences 3 percent inflation. According to PPP, what will be the new value of the Canadian dollar after it adjusts to the inflationary changes? B. Assume the Australian dollar's spot rate is $0.90, and both the Australian and U.S. oneyear interest rates are initially 6%. Then assume that the Australian one-year interest rate increases by 5 percentage points, while the U.S. one-year interest rate remains unchanged. Using this information and the International Fisher Effect (IFE) theory. forecast the spot rate for one year ahead. C. In part B above, the Australia interest rates increased from 6% to 11%. According to IFE: i) What underlying factor would cause such a change? How would this important identified factor affect the U.S. Balance of.Payments (i.e., imports and exports with Australia?). ii) Would you expect the Australian dollar to depreciate or appreciate against the U.S. dollar? Explain iii) Given your answer in ii), would a U.S. investor be wise to invest in an Australian security, say bond, given they are paying this higher 11% interest rate? Explain