2. Use the short-run asset approach to exchange rates. Given the following: expected US dollar/Euro exchange...
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2. Use the short-run asset approach to exchange rates. Given the following: expected US dollar/Euro exchange rate is $1.1100 in one year; one year US interest rate is 4.00%; and one year Eurozone interest rate is 3.00%. (15 pts.). Show your calculations. a. What is the US dollar/Euro spot exchange rate? b. If the expected exchange rate falls to $1.0600 but interest rates remain the same, what is the US dollar/Euro spot rate? c. All other information as in a. If the interest rate in the US rises to 6.00% and the Eurozone rate remains the same, what is the US dollar/Euro spot exchange rate? d. If the interest rate in the Eurozone rises to 4.00% with the US interest rate at 5.00%, and the expected exchange rate at $1.0600, what will the spot exchange rate be? e. What does the relationship between your answers to b and d tell you about the importance of interest rates in each currency zone? 2. Use the short-run asset approach to exchange rates. Given the following: expected US dollar/Euro exchange rate is $1.1100 in one year; one year US interest rate is 4.00%; and one year Eurozone interest rate is 3.00%. (15 pts.). Show your calculations. a. What is the US dollar/Euro spot exchange rate? b. If the expected exchange rate falls to $1.0600 but interest rates remain the same, what is the US dollar/Euro spot rate? c. All other information as in a. If the interest rate in the US rises to 6.00% and the Eurozone rate remains the same, what is the US dollar/Euro spot exchange rate? d. If the interest rate in the Eurozone rises to 4.00% with the US interest rate at 5.00%, and the expected exchange rate at $1.0600, what will the spot exchange rate be? e. What does the relationship between your answers to b and d tell you about the importance of interest rates in each currency zone?
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