The country of Luta has large capital flows with the U.S. It has no trade with the U.S, and will not have trade with the U.S. in the future. Its interest rate is 6%, the same as the U.S. interest rate. Its rate of inflation is 5%, the same as the U.S. inflation rate. You expect that the inflation rate in Luta will rise to 8% this coming year, while the U.S. inflation rate will remain at 5%. You expect that Luta’s interest rate will rise to 9% during the next year. You expect that the U.S. interest rate will remain at 6% this year. Do you think Luta’s currency will appreciate, depreciate, or remain unchanged against the dollar? Briefly explain.
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