Question

5. In the October 23, 1999 issue, the Economist reports that the interest rate per annum is 5.93% in the United States and 70.0% in Turkey. Why do you think the interest rate is so high in Turkey? Based on the reported interest rates, how would you predict the change of the exchange rate between the U.S. dollar and the Turkish lira?

Answer 1

According to the international Fisher Effect (IFE) the high interest rate reflects a high expected rate of inflation in Turkey.

5.93% - 70% = -64.07%

This means that the Turkish Lira is expected to depreciate by 64.07% against the US dollar