Suppose the coronavirus pandemic causes a prolonged recession coupled with mild deflation for the United States (U.S.). However, over the same period, the Chinese economy experienced steady growth and low inflation. Assume R US = 0%, US = 2%, R CN = 4%, and CN = 2%.

a. (3 Points) Does the Fisher effect hold in the numerical example above?

b. (3 Points) Does real interest parity hold in the numeric example above? Does relative PPP hold?

c. (3 Points) What is the expected long-term nominal depreciation rate of the CNY/USD exchange rate?

d. (1 Point) If the U.S. economy shows signs of recovery, what effect does faster output growth have on the nominal exchange rate?