Indicate whether the following statements are True, False, or Uncertain and explain why: (a) If there...

 

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Indicate whether the following statements are True, False, or Uncertain and explain why: (a) If there is free capital mobility between the United States and Germany, then dollar deposits in New York and Frankfurt should have the same interest rate. (b) If uncovered interest rate parity holds, then returns to carry trade must be zero not only on average but period by period. (c) The interest rate in Japan is 0 percent and the interest rate in the United States is 1.75 percent. There is clearly an arbitrage opportunity, as one can become infinitely rich without taking any risk by borrowing in yen and investing in dollars. (d) When the U.S. dollar (the domestic currency) is selling at a premium in the forward market, Ft/Et < 1, one should expect the dollar to depreciate, EtEt+1/Et > 1. Indicate whether the following statements are True, False, or Uncertain and explain why: (a) If there is free capital mobility between the United States and Germany, then dollar deposits in New York and Frankfurt should have the same interest rate. (b) If uncovered interest rate parity holds, then returns to carry trade must be zero not only on average but period by period. (c) The interest rate in Japan is 0 percent and the interest rate in the United States is 1.75 percent. There is clearly an arbitrage opportunity, as one can become infinitely rich without taking any risk by borrowing in yen and investing in dollars. (d) When the U.S. dollar (the domestic currency) is selling at a premium in the forward market, Ft/Et < 1, one should expect the dollar to depreciate, EtEt+1/Et > 1.

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a False Free capital mobility does not necessarily imply that dollar deposits in New York and Frankf... View the full answer