You read on a financial Web site that the nominal interest rate is 12 percent per year in Canada and 8 percent per year in the United States. Suppose that international capital flows equalize the real interest rates in the two countries and that purchasing-power parity holds.

a.Using the Fisher equation (discussed inChapter 5), what can you infer about expected inflation in Canada and in the United States?

b.What can you infer about the expected change in the exchange rate between the Canadian dollar and the U.S. dollar?

c.A friend proposes a get-rich-quick scheme: borrow from a U.S. bank at 8 percent, deposit the money in a Canadian bank at 12 percent, and make a 4 percent profit. What's wrong with this scheme?