Purchasing power parity holds between Kazakhstan and Russia. What is the exchange rate between these two countries, where the only commodity is wheat.
a. In 2011 a one metric ton of wheat costs 42300KZT in Kazakhstan and in Russian Federation the same amount of wheat costs 7700 Rubles. What is the exchange rate between Kazakhstan and Russian Federation?
b. Over the next 20 years, inflation is 3.5% per year in Kazakhstan and 7% per year in RF. What will happen over this period to the price of what and the exchange rate? (Recall the rule of 70)
c. Which of these two nations will likely have a higher nominal interest rate? Why?
d. A friend of yours suggests a get-rich-quick scheme: Borrow from the nation with the lower nominal interest rate, invest in the nation with the higher nominal interest rate, and profit from the interest-rate differential. Do you see any potential problems with this idea? Explain.