Figure: The Forex Market (US: Home; Eurozone: Foreign) Domestic interest rate 7% s (2) 5% is (1) 3% Foreign return given E= 1.224 and le =3% 1.1 1.2 1.3 Spot rate = Ese (Figure: The Forex Market) The Foreign Return line will shift down if the spot exchange rate of dollar against euro gets bigger, everything else constant. the interest rate in Eurozone falls, everything else constant. the expected exchange rate of dollar against euro gets bigger, everything else constant. O the interest rate in the US falls, everything else constant.
Figure: The Forex Market (US: Home; Eurozone: Foreign) Domestic interest rate 7% s (2) 5% is (1) 3% Foreign return given E= 1.224 and le =3% 1.1 1.2 1.3 Spot rate = Ese (Figure: The Forex Market) The Foreign Return line will shift down if the spot exchange rate of dollar against euro gets bigger, everything else constant. the interest rate in Eurozone falls, everything else constant. the expected exchange rate of dollar against euro gets bigger, everything else constant. O the interest rate in the US falls, everything else constant.
Chapter29: International Finance
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Problem 4P
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