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Suppose the annual real and nominal interest rates in Canada are 0.5% and 2.8% respectively in each of the next three years. Suppose the expected
Suppose the annual real and nominal interest rates in Canada are 0.5% and 2.8% respectively in each of the next three years. Suppose the expected annual inflation rates in Australia are respectively 3.5%, 3.9%, and 4.4% in the next three years. Suppose the degree of riskiness of investing in Canada and in Australia is identical. (1) What should be the annual nominal interest rate in Australia in each of the next three years? (ii) Suppose AS is currently trading at a spot exchange rate of C$0.91/AS, what are your predictions of the currency values of AS at the end of the first second, and third year, respectively? (iii) Suppose at the end of the first year, the realized exchange rate turns out to be exactly the same as your prediction in (ii), but the realized inflation rates in Canada and Australia have been 1.5% and 4.5%, respectively. What has been the percentage change in the real value of AS (in Canada) over the first year
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