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MrdTap . Cengage Learning-Google Chrome a Secure https://ng.cengage.com/static/nb/ui/evo/index.htmi?deploymentid-$7535524351130859.. Q 5% MINDTAP Q Search this course Gray v Problems & Applications (Ch 18) Attempts Keep the Highest: 4 9. Probilems and Applications Q9 In 2015, a can of Spam cost & dolars in Ectenia and 24 pesos in Wikoram U thies infletion comes to pass Over the next 14 years, inflation is expected to be 5 pescesnt per year in fEctenia and 10 perdent n vear in w what will haopen over this period to the price of Spam and the exchange rote? Y(t Recall the nule of Over this period, the price of Spam in Ectenia il 70hum outer 27 ) The exchange rate between the two countries True or False: Ectenia will ely have a higher nominal interest rate - True A friend of yours suggests a get-rich quick scheme: borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and prolit from the interest-rabe differenti Which of the tollowing statements explains the flow in your friends logic? The scheme wouild work only if the real interest rates are the same in both nations Nominal exchange rates adjunt for the effects of inftation 0 The scheme would workonly ithere is greater inflation in one nation than in the other,

Explanation / Answer

Exchange Rate = P(wikinan)/P(ecetonia)= 24/4 = 6pesos per dollar

After 14 years prices are

P( wikinan)= 24 + .10*24 = 26.4 pesos

P( ecetonia) = 4 + 0.05*4 = 4.2 dollar

Exchange rate = 26.4/4.2 = 6.29 pesos per dollar

False( wikinan has higher interest rate)

Nominal interest rate adjusted for effect of inflation.

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