Inflation and interest rate effects

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Reference no: EM1345892

The opening of Russia's market has resulted in the highly volatile Russian currency (the ruble). Russia's inflation has basically exceeded 20 percent per month. Russian interest rates commonly exceed 150 percent, but this is sometimes less than annual inflation rate in Russia.

a. Describe why the high Russian inflation has put severe pressure on the value of the Russian ruble.

b. Does the effect of Russian inflation on the decline in the ruble's value support the PPP theory? How might the relationship be distorted by political conditions in Russia?

c. Does it appear that the prices of Russian goods will be equal to the prices of U.S. goods from the perspective of Russian consumers (after considering exchange rates)? Explain.

d. Will the effects of the high Russian inflation and the decline in the ruble offset each other for U.S. importers? That is, how will U.S. importers of Russian goods be affected by the conditions?

Reference no: EM1345892

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