Question: This questions are based on the article, How far will Latin American currencies plummet?, published by the Latin American Business Stories website on May 21,

This questions are based on the article, "How far will Latin American currencies plummet?," published by the Latin American Business Stories website on May 21, 2020. (a) The interest parity (IP) condition states that, (IP) (1 + ir - )ee = (1+ ir*- *)e where e and ee are the spot and expected exchange rates, ir and ir* are market interest rates inclusive of risk at home and foreign country, respectively, and and * are the risk premia of home and foreign financial assets. Consider a Latin American country and treat it as the home economy. Assume that the US is the foreign country. Suppose the risk premium in the home country rises this year, while the market interest rates in both countries, foreign risk premium, and expectations about the future of the exchange rate remain unchanged. How would this temporary increase in risk premium affect the value of home currency against the US dollar as implied by the interest parity condition? (b) In the situation described in part (a), suppose that risks rise not only this year, but also in the coming years. Assume that people form their expectations about the exchange rate in a future year based on what they think may happen in that year. How would the long-term increase in home market risk affect the expected exchange rate next year, ee, and the current spot exchange rate, e? (c) The article points out that Latin American currencies had started depreciating against the US dollar in the past couple of years, before the COVID-19 outbreak. According to the article, what were the causes of that trend? (d) According to the article, how did the COVID-19 outbreak affect the trend in the values of Latin American currencies against the US dollar? How did the macroeconomic policies pursued by LA countries in response to the pandemic affect the trend in LA currencies

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