Consider the exchange rate between Peru and Pakistan. Typically exchange rates vary over time, sometimes quite dramatically. The following list presents various changes that may affect the exchange rate. You must use the labels on the bottom to indicate whether the change will tend to cause an appreciation, depreciation, or have no effect, in the exchange rate of Peruvian ne sol relative to Pakistani rupee.
A) The magazine The Economist publishes an article indicating that analysts expect the value of Pakistani rupee to rise relative to Peruvian neuvo sol.
B) The central bank in Peru announces that it is going to raise interest rates on government bonds.
C) Based on a World Bank report, the inflation rate in Peru is going to be 4% next year, while the inflation rate in Pakistan is going to be 9%.
D) The price of a specific basket of goods in Peru is roughly 1.2 times higher than an identical basket of goods in Pakistan, even after adjusting for the exchange rate. Incorrect. Since the inflation rate in Peru is going to be lower than in Pakistan, depositors will tend to shift their funds from Pakistan to Peru, increasing the demand for Peruvian neuvo sol.