Problem 5. Over the next year, the expected inflation rate in Australia is 2%, and the real interest rate inAustralia is also 2%. You expect the Australian dollar to appreciate by 3% relative to the Japanese yen.

a. If relative purchasing power parity holds, what is the expected inflation rate in Japan?

b. If the domestic Fisher effect holds, what is the nominal interest rate in Australia? If the internationalFisher effect holds, what is the nominal interest rate in Japan?

c. You redo your forecasts. You still expect inflation in Australia to be 2% and the real interest rate to be 2%.However, you expect inflation in Japan to be 10%.

i. Assuming that the international Fisher effect holds, what is the nominal interest rate in Japan?

ii. Assuming that relative PPP holds, what is the expected percent appreciation or depreciation of the Australian dollar against the Japanese yen over the next year? Is this consistent with the prediction of uncovered interest rate parity?