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Assume that the Covered (CIP) and Uncovered Interest Parity (UIP) con- ditions hold, and that relative Purchasing Power Parity (PPP) is satisfied.
Assume that the Covered (CIP) and Uncovered Interest Parity (UIP) con- ditions hold, and that relative Purchasing Power Parity (PPP) is satisfied. You read in the newspaper that the current spot EUR/USD exchange rate is 1.20, and that the three-month EUR/USD forward exchange rate is 1.15. Are the following statements TRUE or FALSE when CIP, UIP, and relative PPP hold? Explain.
a. (3 Points) The current US nominal interest rate exceeds that in Eu- rope.
b. (3 Points) The expected inflation rate in the US exceeds that in Eu- rope.
c. (4 Points) The current real interest rate in the US exceeds that in Europe.
