Explanatory power-difference in interest rates

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Interest rate parity suggests that the difference in interest rates between two countries affects the change in exchange rates over time. While not a perfect predictor, it has been shown to be an unbiased predictor and has more explanatory power than either version of PPP.

a) Why do you think that IRP is a better predictor?

b) Explain how IRP incorporates relative purchasing power parity as well as theories that use differences in money supply to account for changes in exchange rates.

Reference no: EM131103880

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