PPP and Real Interest Rates
Response to the following problem:
The nominal (quoted) U.S. 1-year interest rate is 6 percent, while the nominal 1-year interest rate in Canada is 5 percent. Assume you believe in purchasing power parity. You believe the real 1-year interest rate is 2 percent in the United States, and that the real 1-year interest rate is 3 percent in Canada. Today the Canadian dollar spot rate is $.90. What do you think the spot rate of the Canadian dollar will be in 1 year?