Interest rate parity suggests that the difference in interest rates between two countries affects the change in exchange rates over time. While not a perfect predictor, it has been shown to be an unbiased predictor and has more explanatory power than either version of PPP.
a) Why do you think that IRP is a better predictor?
b) Explain how IRP incorporates relative purchasing power parity as well as theories that use differences in money supply to account for changes in exchange rates.