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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.
Consider the economy whose data appear in the table below. Working-age population 100,000 Labor force 80,000 Unemployed 12,000 Instructions: The unemployment rate is %. The labor-force participation rate is %.
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