Suppose the interest rate on a domestic debt instrument is 10% and the expected rate of inflation is 5%. Further, suppose that the foreign nominal rate on a similar instrument is 6% and expected foreign inflation rate is 4%. Based upon the real interest rates what is your forecast of the future value of the domestic currency? Explain.© BrainMass Inc. brainmass.com March 4, 2021, 6:07 pm ad1c9bdddf
First calculate the real interest rate for both the countries.
Real Interest Rate = (1+nominal Interest rate)/(1+inflation rate)-1
For home country ...
The expert calculates the real interest rate for both the countries.