Assume you fully believe that any movements in the exchange rate can be predicted using the inflation rate differential between countries (i.e., you believe in the purchasing power parity). You collect some data on Chile and Paraguay and find that the two countries have the same nominal interest rate. However, the central bank of Paraguay just made an announcement suggesting a downward revise of the real interest rate with no expected change in the nominal interest rate.

Based on this information, what do you think will be the effect on the Paraguayan guaran (the Paraguayan currency)? Will it appreciate, depreciate, or remain constant? Explain briefly your reasoning.

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