Holooly Rewards

We are determined to provide the latest solutions related to all subjects FREE of charge!

Please sign up to our reward program to support us in return and take advantage of the incredible listed offers.

Enjoy Limited offers, deals & Discounts by signing up to Holooly Rewards Program

Holooly Ads. Manager

Advertise your business, and reach millions of students around the world.

Holooly Tables

All the data tables that you may search for.

Holooly Arabia

For Arabic Users, find a teacher/tutor in your City or country in the Middle East.

Holooly Sources

Find the Source, Textbook, Solution Manual that you are looking for in 1 click.

Holooly Help Desk

Need Help? We got you covered.

Chapter 8

Q. 8.ST.6

In the previous question, the Australian interest rates increased from 6 to 11 percent. According to the IFE, what is the underlying factor that would cause such a change? Give an explanation based on the IFE of the forces that would cause a changein the Australian dollar. If U.S. investors believe in the IFE, will they attempt to capitalize on the higher Australian interest rates? Explain.


Verified Solution

According to the IFE, the increase in interest rates by 5 percentage points reflects an increase in expected inflation by 5 percentage points.
If the inflation adjustment occurs, the balance of trade should be affected, as Australian demand for U.S. goods rises while the U.S. demand for Australian goods declines. Thus, the Australian dollar should weaken.
If U.S. investors believed in the IFE, they would not attempt to capitalize on higher Australian interest rates because they would expect the Australian dollar to depreciate over time.