International Finance Theory and Policy
by Steven M. Suranovic

Finance 20

Finance Problem Set 20 2-3

1. Consider the economic changes listed along the left column of the following Table.  In the boxes indicate the effect of each change on the variables listed in the first row.  Use insights from the interest rate parity model or the purchasing power parity model to determine the answers.  Assume floating exchange rates.  You do not need to show your work.   Use the following notation:

                                                +    the variable increases
                                                -     the variable decreases
                                                0    the variable does not change
                                                A   the variable change is ambiguous (i.e. it may rise, it may fall)


US dollar value


 A decrease in US interest rates 



 An increase in expected US
 economic growth that raises
 expected asset values



 An expected increase in
 European stock values





International Finance Theory and Policy - Chapter 6: Last Updated on 5/01/08