What does the fisher relation state

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Question - Assuming that in year 0 two countries, Japan and Vanuatu, have their exchange rates in equilibrium, with Yen 100 = 200 Vatu. The expected inflation in Japan for the next year is 2%, while that in Vanuatu is expected to be 8%.

1. What does the Fisher Relation state that the nominal interest rate in each country over the next year will be, assuming that the real interest rate in both countries is 4%. Be precise as possible. (a) Japan 1.0608% Vanuatu 1.1232% (b) Japan 6.08% Vanuatu 13.21% (c) Japan 6% Vanuatu 12.32% (d) Japan 6.08% Vanuatu 12.32% (e) None of the above

2. What does Purchasing Power Parity Theory say that the Yen/Vatu exchange rate will be in one year? (a) Yen 100 = 211.76 Vatu (b) Yen 100 = 188.88 Vatu (c) Yen 100 = 200 Vatu (d) Yen 100 = 215.31 Vatu (e) None of the above

Reference no: EM133273689

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