Question: True or False ? T F 1. Purchasing power parity defines the relationship between the change in the future spot rate and the inflation differential.

True or False ?

T F 1. Purchasing power parity defines the relationship between the change in the future spot rate and the inflation differential. 2. The forward rate is an unbiased predictor of the future spot rate. 3. Interest rate parity is the relationship between the change in the future spot rate and the interest differential. T F 4. Absolute purchasing power parity states that the price of a commodity in one currency divided by the price of the commodity in the other currency should equal the exchange rate between the two currencies. T F 5. Covered interest arbitrage should yield a zero percent rate of return in an efficient foreign exchange market. T F 6. The rate of return on an investment is the risk free rate of return plus a risk premium. T F 7. The currency of the country with the lower inflation rate will depreciate. T F 8. If the nominal exchange rate is 20% and the inflation rate is 10%, the real interest rate is more than 9.5%. T F 9. If a hat costs 20 Euros and the same hat costs 10 dollars, the exchange rate is two Euros for one dollar. T F 10. According to interest rate parity, the forward rate is the current spot rate tiems one plus the interest differential

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