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Please Sir kindly help me with these 3 problems of mine!
1) Is it true that according to Fisher Model assumption if there is an increase in interest rate it will instigate the increase in inflation rate (they move together) and eventually increase in interest & inflation rates will cause the local currency to depreciate more?
2) If there is a depreciation in local currency against the foreign currency the exchange rate will be increasing against Foreign Currency like this:
If Pound is Local Currency against Foreign Currency of $:
Pound 1.50 / $1After depreciation caused by increase in interest & inflation in Local Currency:
Pound 1.60 / $13) By using IRP formula, if the Forward rate of Foreign Currency is higher than Local Currency, then the nominal interest rate in Foreign Country will also be higher that of Local Country?
And By using PPP formula, if the spot rate of Foreign Currency is higher than Local Currency, then the inflation rate in Foreign Country will also be higher that of Local Country?
1. Yes it is true.
2. What you have written is correct (although in the exam exchange rates are generally written the other way round, as I explain in my free lectures).
3. Also correct.
Have you watched my free lectures on forward rates and on forecasting future spot rates?
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