Assume PPP Holds at a Time When the Exchange Rate

question 101

Essay

Assume PPP holds at a time when the exchange rate is DM1.09/$(Canadian) and a market basket of goods costs DM500.How many Dollars would you expect to spend on the goods? Germany is expecting 10% inflation while Canada is expecting 4% inflation.What would you predict to happen to exchange rates?

Assess the implications of inflation expectations and maturity risk premiums on bond yields.

Explain the principles of reinvestment risk and interest rate risk in the context of bond investments.

Understand how various factors shift the consumption function.

Learn the relationship between price levels and consumption.

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