Inflation and interest rate effects. The opening of Russia's market has resulted in a highly volatile Russian currency (the rouble). Russia's inflation has commonly exceeded 20% per month. Russian interest rates commonly exceed 150%, but this is sometimes less than the annual inflation rate in Russia.
a. Explain why the high Russian inflation has put severe pressure on the value of the Russian rouble.
b. Does the effect of Russian inflation on the decline in the rouble's value support the PPP theory? How might the relationship be distorted by political conditions in Russia?
c. Does it appear that the prices of Russian goods will be equal to the prices of UK goods from the perspective of Russian consumers (after considering exchange rates)? Explain.
d. Will the effects of the high Russian inflation and the decline in the rouble offset each other for UK importers? That is, how will UK importers of Russian goods be affected by the conditions?