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    PPP and IFE

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    Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in the United States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these two countries? Using this information and the PPP theory, describe the expected nominal return to U.S. investors who invest in Mexico.

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    If investors from the U.S. and Mexico required the same real (inflation?adjusted) return, then any difference in nominal interest rates is due to differences in ...

    Solution Summary

    This posting answers the student's question related to Purchasing Power Parity and the International Fisher Effect (IFE).