Using the Exact International Fisher Effect from our discussion of the Fisher effect in chapter, we know

Question:

Using the Exact International Fisher Effect from our discussion of the Fisher effect in chapter, we know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation rate, h, can be written as : 1 + r = 1 (1 + R) / (1 + h) This is the domestic Fisher effect.

a. What is the non-approximate form of the international Fisher effect?

b. Based on your answer in (a), what is the exact form for UIP?

c. What is the exact form for relative PPP?

d. Recalculate the NPV for the Kihlstrom drill bit project (discussed in section 22.5) using the exact form for UIP and the international Fisher effect. Verify that you get precisely the same answer either way.

Fisher Effect
The Fisher Effect is an economic theory created by economist Irving Fisher that describes the relationship between inflation and both real and nominal interest rates. The Fisher Effect states that the real interest rate equals the nominal interest...