a) Does purchasing power parity hold? If not, does PPP predict that the $C (loonie) real will appreciate or depreciate against the U.S. dollar? Explain. b) Does interest rate parity hold? If not, why not? Will the $C appreciate further or depreciate against the U.S. dollar if the Fed raises the interest rate while the Canadian interest rate remains at 0.72 percent a year?
Give typing answer with explanation and conclusion
Is the Loonie Going Up or Down?
The price of a Big Mac is $C6.00 in Toronto and $US5.30 in New York. The exchange rate is $C1.28 per U.S. dollar. The 3-month interest rate is 0.72 percent in Canada and 1.00 percent in
the United States.
Source: The Economist, The Federal Reserve System, and the Bank of Canada, July 2017
a) Does
b) Does interest rate parity hold? If not, why not? Will the $C appreciate further or depreciate against the U.S. dollar if the Fed raises the interest rate while the Canadian interest rate remains at 0.72 percent a year?
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