Econ303: International Money and FinanceTutorial 21. Imagine that everyone in the world pays a tax of t % on interest earnings and onany capital gains due to exchange rate changes. How could such a tax alter theanalysis of the interest parity condition? How does the answer change if the taxapplies to interest earnings but not to capital gains, which are untaxed?2. Analyse how the current exchange rate between Home currency and Foreigncurrency will be affected in the following cases:a) A temporary decrease in demand for money in Home country.b) A temporary decrease in money supply in Foreign country.c) A permanent decrease in money supply in Foreign country.d) A change in expectations about monetary policy: Home country residentsexpect that the central bank will permanently increase money supply next quarter.3. Suppose that country A’s expected inflation rate is 50% and country B’s expected
This is the end of the preview.
access the rest of the document.