1
Q
International parity conditions
A
- Covered interest rate parity (CIP)
- uncovered interest rate parity (UIP)
- absolute purchasing power parity (PPP)
- relative purchasing power
- fisher effect
2
Q
Absolute purchasing power parity (PPP)
A
- ER as a ratio of price levels
- If the absolute PPP holds, then the internal purchasing power of a currency is equal to the external purchasing power of the same currency in another country.
- Violation of the absolute PPP implies it is cheaper to buy from one country and sell at a higher price in another country.
3
Q
Relative purchasing power
A
- change in ER by inflation differential
4
Q
Fisher effect
A
- expected inflation rate = nominal interest rate - real interest rate
5
Q
Summary of PPP
A
- PPP theory specifies a precise relationship between the relative inflation rates of two countries and their exchange rate
6
Q
Summary of IFE
A
- IFE specifies a precise relationship between relative interest rates of two countries and their exchange rates
7
Q
Law of one price
A
- two things equal to each other must sell for the same price
- prevails when the same or equivalent things are trading at the same price across different locations/markets
8
Q
A
