Assignment 3 Question 1. You are an analyst for the economic analysis division of a well known financial institution. The director of the division has just put you in charge of a project to analyze the position of Europe among other economies. Using inflation forecasts and 3-month money market interest rates from the Economist, you construct the following table: Country Australia Canada Denmark Euro Area Japan Sweden United States Inflation Rate (% p.a.) 5.00 1.00 2.40 1.50 0.90 1.20 0.70 Interest Rate (% p.a.) 3.50 1.10 6.00 2.10 0.80 1.50 0.50 a) If uncovered interest parity holds, do you expect that the Australian dollar will appreciate against the other currencies in the next 3 months? Indicate the proportion by which you expect the Australian dollar to appreciate or depreciate against each of the currencies. b) Do you expect that the competitiveness of Australia will improve against the other countries in the next three months? Indicate the proportion by which you expect the competitiveness of Australia to improve or deteriorate against each country. c) Do you expect that output growth rate will be higher for Australia than for the other countries? Why? Rank countries according to your forecasted output growth rates. Answer: Use Real Interest Rates. See attached table