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# PACh20 - Econ 520(Spring 2007 Answers to Problems for...

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Econ 520 (Spring 2007) Answers to Problems for Chapters 20 Masao Ogaki (1) The expected rate of return on U.S. bonds is equal to the domestic interest rate. Hence when the domestic interst falls, the schedule for the expected return on U.S. bonds shifts to the left. The exchange rate rises as in the diagram below. Hence the dollar depreciates. Today°s exchange rate, E t Expected rates of return in dollar terms Expected return on foreign bonds Expected return on U.S. bonds, i E 1 E 2 ° 1 2 @ @ @ @ @ @ @ @ @ - 6 (2) The expected return on foreign bonds falls when the foreign interest rate falls at each level of today°s exchange rate. Hence the schedule for the expected return on foreign bonds sh±ts to the left. The exchange rate falls as in the diagram below. Hence hte dollar appreciates. 1

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Today°s exchange rate, E t Expected rates of return in dollar terms Expected return on foreign bonds Expected return on U.S. bonds, i E 2 E 1 ° 2 1 @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ - 6 (3) The expected return on foreign bonds increase when the dollar is expected to depreciate in the next year. Hence the schedule for the expected return on
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