Suppose that the exchange rate of the euro with respect to the US dollar is given by the following function: E/$ = 1 + 0.1 (100  (rU S  rE ))2 where rU S denotes the interest rate in the US and rE the one in the Eurozone. 

(a) Plot the function presented above for different value of interest rate differentials between the US and the Eurozone. Does the behavior of the curve make economic sense when the differential of interest rates is strictly positive? Explain your answer. 

 

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To plot the function E 1 01100rUS rE2 for different values of interest rate differentials between the US and the Eurozone we can use a graphing tool o... View the full answer