Combined with purchasing power parity, UIP => equality of real interest rates Real exchange rate is & = E. P Hence %A& = e+ 7 -7 so that PPP implies 0=e+7-7 and thus e=1 -It Suppose E is expected to change in accordance with relative PPP e = TT e* But UIP implies e =r -r so that THE UNIV r - Y = 1 * e or r-me=r-T SYD