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.

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 apply to my work.

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 are correct.

5. Based on this theory, the country that has a higher rate of inflation should expect a rise 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 are correct.