1.Suppose the dollar interest rate and the pound sterling interest rate are the same, 5 percent...

 

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1.Suppose the dollar interest rate and the pound sterling interest rate are the same, 5 percent per year. What is the relation between the current equilibrium $/£ exchange rate and its expected future level? Suppose the expected future $/£ exchange rate, $1.52 per pound, remains constant as Britain's interest rate rises to 10 percent per year. If the U.S. interest rate also remains constant, what is the new equilibrium $/£ exchange rate? 2. Traders in asset markets suddenly learn that the interest rate on dollars will decline in the near future. Use the diagrammatic analysis of this chapter to determine the effect on the current dollar/euro exchange rate, assuming current interest rates on dollar and euro deposits do not change. 1.Suppose the dollar interest rate and the pound sterling interest rate are the same, 5 percent per year. What is the relation between the current equilibrium $/£ exchange rate and its expected future level? Suppose the expected future $/£ exchange rate, $1.52 per pound, remains constant as Britain's interest rate rises to 10 percent per year. If the U.S. interest rate also remains constant, what is the new equilibrium $/£ exchange rate? 2. Traders in asset markets suddenly learn that the interest rate on dollars will decline in the near future. Use the diagrammatic analysis of this chapter to determine the effect on the current dollar/euro exchange rate, assuming current interest rates on dollar and euro deposits do not change.

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1 Step 1 Relation between the current equilibrium exchange rate and expected future level The current equilibrium exchange rate must equal its expecte... View the full answer