1. Assume the spot rate of the euro is $1.16, and over the next year the Eurozone inflation rate is 2% while the US inflation rate is 3%. According to purchasing power parity (PPP), what will the spot exchange rate be after one year? Assume the spot rate of the euro is $1.16 and the one-year interest rate for the Eurozone and the US are both initially 4.5%. Then assume that the US interest rate decreases to 4% while the Eurozone interest rate remains at 4.5%. According to the international Fisher effect (IFE),
2. 1. What will the spot exchange rate be after one year?
3. 2. What is the underlying factor that would cause such a change in the interest rate differential?