Consider the following table. There are two countries and two goods.

Assume both countries have the same price table:

Time	t	t+1
P1	$8	$10
P2	$4	$5

a. Assume commodity price parity. What is the foreign currency price of the two goods at the two points in time? What is the domestic inflation rate? What is the foreign inflation rate.

b. Suppose PPP is known to hold as is covered interest parity between two countries. What determines any differences between the expected real returns on risk free interest bearing assets in the two countries?

Answer rating: 100% (QA)

Explanation Detailed explanation Question 2 part a At time t the foreign currency price of commodity ... View the full answer