(Esve - Ese)EsjeInterest rateInterest rateExpected rate ofdepreciation of the dollaron dollar depositson euro depositsDollar rate of returnon dollar depositsExpected dollar rate of returnon euro depositsExpected futureexchange rate (inone year)Interest rate onInterest rate ondollar depositeuro deposit0.010.031.2250.010.031.2250.010.031.2250.010.031.2251) Assume that spot exchange rate is Edollar/euro=1.16. Calculate and state values of domestic return and foreign return.Is this an equilibrium point for the FX market? Explain why.

Interest rate parity condition is a state where investors cannot take advantage of differences in…

Interest rate on dollar deposits = Dollar rate of return on dollar deposits Interest rate on dollar deposit 0.01 0.01 0.01 0.01 Interest rate on euro deposits Interest rate on euro deposit + 0.03 0.03 0.03 0.03 (Es/€ - Es/€) Eg/€ Expected dollar rate of return on euro deposits Expected rate of depreciation of the dollar Expected future exchange rate (in one year) 1.225 1.225 1.225 1.225 1) Assume that spot exchange rate is Edollar/euro=1.16. Calculate and state values of domestic return and foreign return. Is this an equilibrium point for the FX market? Explain why.

Interest rate on dollar deposits = Dollar rate of return on dollar deposits Interest rate on dollar deposit 0.01 0.01 0.01 0.01 Interest rate on euro deposits Interest rate on euro deposit + 0.03 0.03 0.03 0.03 (Es/€ - Es/€) Eg/€ Expected dollar rate of return on euro deposits Expected rate of depreciation of the dollar Expected future exchange rate (in one year) 1.225 1.225 1.225 1.225 1) Assume that spot exchange rate is Edollar/euro=1.16. Calculate and state values of domestic return and foreign return. Is this an equilibrium point for the FX market? Explain why.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 14RQ: What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?

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