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Suppose the domestic price level is expected to increase by 20% over the next year, the expected increase in the real exchange rate (domestic basket goods and services per foreign basket of goods and services) over the next year is 4%, and the domestic 1-year interest rate is 28%. According to real interest parity, what should be the foreign 1 - year expected real interest rate?

Suppose the domestic price level is expected to increase by 20% over the next year, the expected increase in the real exchange rate (domestic basket goods and services per foreign basket of goods and services) over the next year is 4%, and the domestic 1-year interest rate is 28%. According to real interest parity, what should be the foreign 1 - year expected real interest rate?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter6: Managing In The Global Economy
Section: Chapter Questions
Problem 12E
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Suppose the domestic price level is expected to increase by 20% over the next year, the expected increase in the real exchange rate (domestic basket goods and services per foreign basket of goods and services) over the next year is 4%, and the domestic 1-year interest rate is 28%. According to real interest parity, what should be the foreign 1 - year expected real interest rate?
Transcribed Image Text:Suppose the domestic price level is expected to increase by 20% over the next year, the expected increase in the real exchange rate (domestic basket goods and services per foreign basket of goods and services) over the next year is 4%, and the domestic 1-year interest rate is 28%. According to real interest parity, what should be the foreign 1 - year expected real interest rate?
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