Assume the nominal interest rate is $10$ percent in Australia $($AUD$)$ and $5$ percent in France $($EUR$)$ in the next year. At the same time, inflation is running at an annual rate of $5$ percent in Australia $($AUD$)$ and $0$ percent in France $($EUR$)$ for the next year. The current exchange rate is AUD$1\mathrm{.}6/$EUR$.$ Use the approximated version of the real interest rate calculation for this question: real interest rate $=$ nominal interest rate $-$ inflation rate.

Which of the following statements is true?

Question $10$Answer

a$.$

According to Relative Purchasing Power Parity, exchange rate would become AUD$1\mathrm{.}52/$EUR in the next year.

b$.$

If all the parity conditions $($covered and uncovered IRP, absolute and relative PPP$,$ and International FE$)$ hold, there cannot be an arbitrage.

c$.$

Fisher effect does not hold since real interest rates are different.

d$.$

If Absolute Purchasing Power Parity holds, exchange rate would become AUD$1\mathrm{.}52/$EUR in the next year.