ssuming that in year 0 two countries, Japan and Vanuatu, have their exchange rates in equilibrium, with Yen 100 = 200 Vatu. The expected inflation in Japan for the next year is 2%, while that in Vanuatu is expected to be 8%.

1. What does the Fisher Relation state that the nominal interest rate in each country over the next year will be, assuming that the real interest rate in both countries is 4%. Be precise as possible.

2. What does Purchasing Power Parity Theory say that the Yen/Vatu exchange rate will be in one year?

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According to the Fisher Relation the nominal interest rate in each country will be equal to the r... View the full answer