Using the following data on spot exchange rate of Poland against the U.S. dollar and the annual inflation rates of these two countries, forecast the outright values of 6 and 12 months ahead of the Polish currency. Use the more accurate approach.

Polish currency is called Zloty (= PLN)

Spot rate PLN 4.26/USD

US inflation rate 2.2 percent

Polish inflation rate 4.4 percent

Review the following questions. Please show work.

1. The outright forecast for 6 months is:

2. The outright forecast for 12 months is:

3. The theory that you are using is called:

a. Purchasing power parity

b. Interest rate parity

c. Fisher effect

d. International fisher effect

e. None of the answers in this group is correct.

4 This theory holds very well in the:

a. Short-run

b. Long-run

c. Chaotic periods only

d. None of the answers in this group is correct.

5. Based on this theory, the country that offers a higher rate of interest should expect a fall in the value of its currency.

a. I agree

b. I disagree

c. You really cannot tell

d. Never heard of such a thing!

e. None of the answers in this group is correct.