Question

For the problem below, assume the exchange rates and the exchange rate market between the U.S.dollar and the euro. (Approximate to 3 decimal places) a) Define and explain the interest

parity condition b) Assume that the euro interest rate is constant at 5 percent, and that the expected exchange rate is 1.05 dollars per one euro. Find the expected dollar return on euro deposits for the following cases c) if the interest parity condition were to hold and if the U.S. interest rate set by the Fed is 6.9%A llustrate in the graph which case from above would be the equilibrium paint in the foreign exchange market between the dollar and euro? Explain. d) Suppose the Fed decided to raise the interest rate to 10% From the table above, illustrate in a graph the old equilibrium and the new equilibrium point by the appropriate shift. Does the dollar appreciate or depreciate as a result of this action by the Fed? Explain.

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