Suppose a Country Is Experiencing Significant Productivity Growth of 5

question 67

Short Answer

Suppose a country is experiencing significant productivity growth of 5% relative to that of another country with 2% productivity growth. Both countries have about 40% of their consumption in nontraded goods. What does this imply about the rate at which the exchange rate will change?

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Definitions:

Interest Rate Parity

An economic theory stating that the difference between interest rates in two countries is equal to the expected change in exchange rates between their currencies.

Relative PPP

Relative Purchasing Power Parity, a theory which states that the rate of inflation between two countries will be offset by an equal but opposite change in the exchange rate.

International Fisher

An economic theory stating that the difference in nominal interest rates between two countries is directly proportional to the expected change in the exchange rates between their currencies.

Strengthening

Generally refers to the process of becoming stronger or more firm, often used in financial contexts to describe currencies or economies that are improving in value or performance.