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Unformatted text preview: his is because an increase in government spending increases aggregate
demand in the economy, which causes the real interest rate to rise. The rise in the interest rate
reduces investment and encourages private saving.
11. What is an x% filter rule?
Answer: An x% rule states that you should go long in the foreign currency (buy) after the
foreign currency has appreciated relative to the domestic currency by x% above its most
recent trough (or support level) and that you should go short in the foreign currency (sell)
whenever the currency falls x% below its most recent peak (or resistance level). Common
x% filter rules are 1% or 2%.
14. Are devaluations of pegged exchange rates totally unexpected?
Answer: While there is a debate about their predictability, some theories suggest that
devaluations may be partially predictable. T...
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