Suppose that expected inflation in the U.S. is 1.9% and the expected inflation rate in China is 1.8%. Provide an argument or several arguments to tie this differential to as many of the following as possible.
Current Nominal Interest Rate Gaps
Current Real Interest Rate Gaps
Current Spot Exchange Rates
Current Forward Exchange Rates
Expected Future Nominal Interest Rate Gaps
Expected Future Real Interest Rate Gaps
Expected Future Spot Exchange Rates
Expected Future Forward Exchange Rates