1. The interest rate in England is 12%; in Switzerland it is 5%. What are possible reasons for this interest rate differential? What is the most likely reason?
2. From 1982 to 1988, Peru and Chile stand out as countries whose interest rates were not consistent with their inflation experience. Specifically, Peru's inflation and interest rates averaged about 125% and 8%, respectively, over this period, whereas Chile's inflation and interest rates averaged about 22% and 38%, respectively.
a. How would you characterize the real interest rates of Peru and Chile (e.g., close to zero, highly positive, highly negative)?
b. What might account for Peru's low interest rate relative to its high inflation rate? What are the likely consequences of this low interest rate?
c. What might account for Chile's high interest rate relative to its inflation rate? What are the likely consequences of this high interest rate?
d. During this same period, Peru had a small interest differential and yet a large average exchange rate change. How would you reconcile this experience with the international Fisher effect and with your answer to Part b?