ch12 (4) - Figure 15.3 (a): A Change in the Home Interest...

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Figure 15.3 (a): A Change in the Home Interest Rate A rise in the dollar interest rate from 5% to 7% increases domestic returns, shifting the DR curve up from DR 1 to DR 2 . At the initial equilibrium exchange rate of 1.20 $/€ on DR 2 , domestic returns are above foreign returns at point 4. Dollar deposits are more attractive and the dollar appreciates from 1.20 $/€ to 1.177 $/€. The new equilibrium is at point 5. Decrease in the foreign interest rate, i FR shifts downward. E $/€ decreases (home currency appreciates). Figure 15.3(b): A Change in the Foreign Interest Rate A fall in the euro interest rate from 3% to 1% lowers foreign expected dollar returns, shifting the FR curve down from FR 1 to FR 2 . At the initial equilibrium exchange rate of 1.20 $/€ on FR 2, foreign returns are below domestic returns at point 6. Dollar deposits are more attractive and the dollar appreciates from 1.20 $/€ to 1.177 $/€. The new equilibrium is at point 7. Decrease in expected exchange rate E
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This note was uploaded on 03/02/2012 for the course EC 340 taught by Professor Ballie during the Spring '10 term at Michigan State University.

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ch12 (4) - Figure 15.3 (a): A Change in the Home Interest...

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