Overview

Chapter 8 describes the theory of purchasing power parity, which explains how inflation in the prices of goods and services in two different countries impacts the exchange rate between the two countries' currencies over time. Chapter 8 also describes the International Fisher Effect theory, which explains how the interest rates in two countries impact the exchange rate between the two countries' currencies over time. Financial managers of multinational corporations need to understand how relative inflation rates and interest rates impact exchange rates so that they can anticipate how their firm and their foreign competitors may be affected.

Module Objectives

In this module, our activities, content, and assignments will help you do the following:

Explain the Purchasing Power Parity theory and its implications for exchange rate movements over time.
Explain the International Fisher Effect theory and its implications for exchange rate movements over time.

Readings

Required readings for this week:

Chapter 8: Relationships among Inflation, Interest Rates, and Exchange Rates

Module To-Do List

Here's everything you need to do and remember for this module:

Attend the Live Session
Midterm Exam
Complete Chapter 8 Homework