Let's try to solve a covered interest parity problem. You have the opportunity to invest in the U.K. for 30 days or keep your money in the U.S.You are given the following data:

The current spot exchange rate is $0.50 per British Pound

The day forward exchange rate is $0.505 per British Pound

Annualized interest rate on a 30-day dollar-denominated asset is 12% (or 1.0% for 30 days).

Annualized interest rate on a 30-day pound-denominated asset is 6 (or 0.5% for 30 days).

1. Does Covered Interest Parity hold?
2. What is the covered interest differential an American investor would realize if they invested in the U.K.? (In other words, what is the value for CD applying the covered interest parity formula.
3. Economists believe that the __________ determines the price level in the long run.

• A. Money supply
• B. Money demand
• C. Supply of government securities
• D. Demand for government securities
• E. None of the above

4.T or F? In the short run, exchange-rate movements are large and unpredictable.

5.Domestic Currency ________________(appreciates/depreciates/is unchanged) when the domestic money supply falls relative to the foreign money supply.