Explain carefully why will homer be disappointed

Reference no: EM13244758

The Springfield Times reports that the nominal interest rate inthe neighboring economy of Shelbyville is 12% per year and 8% peryear in Springfield. Suppose that the real interest rates areequalized in the two economies and that purchasing power parityholds.

(a) What can you infer about expected inflation in Springfield andShelbyville?

(b) What can you infer about the expected change in the exchangerate between the Shelbyville dollar and the Springfield dollar?

(c) After reading the newspaper Homer Simpson embarks on thefollowing get-rich-quick scheme: he borrows money from aSpringfield bank at 8% and deposits it in a Shelbyville bank at12%, expecting to make a 4% profit. Explain carefully why will Homer be disappointed?

Reference no: EM13244758

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