Page 418 - Book 3 EOC Questions
For Questions 20-23 in this section it has a case with an example on SEK/EUR exchange rates pertaining to Question 22. The case info states that due to Swedish monetary tightening, the SEK/EUR exchange rate is now trading at a forward premium.
So does this mean that monetary tightening will lead to higher nominal interest rates? I am confused by this, so with monetary tightening, we would expect inflation to decrease. This would lead to lower nominal rates. Why would SEK/EUR be trading at a premium if SEK is experiencing monetary tightening? Does monetary tightening = low expected inflation, higher nominal rates, or higher real rates?
In terms of monetary policy, loose monetary policy = high expected inflation. Does this mean nominal rates increase because of high expected inflation or nominal rates decrease because the central bank is targeting lower rates?