RQ_Solution_%28Ch_13%29

RQ_Solution_%28Ch_13%29 - ECMC61 Chapter 13 Review...

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ECMC61 – Chapter 13 Review Questions Answer Key Question 1:Chapter 13, Problems #6 Interest rate parity: - + = $/£ $/£ e $/£ £ $ E E E R R Let USD ($) be domestic currency and pound sterling (£) be foreign currency. Suppose the dollar interest rate and the pound sterling interest rate are the same, 5% per year, R $ = R £ = 0.05: For IRP to hold, $/£ $/£ e $/£ E E E - = 0. This implies 0 E E $/£ e $/£ = - $/£ e $/£ E E = . The current exchange rate, E, must equal the expected future exchange rate, E e , with equality of nominal interest rates, there can be no expected increase or decrease in the $/£ exchange rate in equilibrium. Suppose the expected future $/£ exchange rate, $1.52 per pound, remains constant as Britain’s interest rate rises to 10% per year. If the U.S. interest rate also remains constant at 5%, the new equilibrium $/£ exchange rate is: Given the above information, IRP implies $/£ $/£ E E - 1.52 0.1
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This note was uploaded on 02/05/2011 for the course ECM 61 taught by Professor Jackparkinson during the Summer '10 term at University of Toronto.

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RQ_Solution_%28Ch_13%29 - ECMC61 Chapter 13 Review...

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