From the covered interest parity, we know that when the forward premium for the home currency against a foreign currency, F(home/foreign), is positive, the domestic interest rate should be: Question 2 Answer a. less than the foreign interest rate. b. greater than the foreign interest rate. c. less than the forward premium. d. greater than the forward premium.

Therefore, according to the uncovered interest parity condition, the domestic interest rate should be equal to the foreign interest rate (r*). If the domestic interest rate were higher than the foreign interest rate, investors would buy the domestic currency to take advantage of the higher interest rate, which would put upward pressure on the domestic currency and violate the fixed exchange rate.

Assume the interest parity condition holds and that the foreign interest rate is equal to the domestic interest rate. A reduction in the foreign interest rate will causeGroup of answer choicesa decrease in the nominal exchange rate.an increase in the nominal exchange rate.an expected appreciation of the domestic currency.none of the above

Given a home country and a foreign country, purchasing power parity suggests that:Select one:a.The Home Currency Will Appreciate If The Current Home Inflation Rate Exceeds The Current Foreign Inflation Rate.b.The Home Currency Will Depreciate If The Current Home Interest Rate Exceeds The Current Foreign Interest Rate.c.The Home Currency Will Depreciate If The Current Home Inflation Rate Exceeds The Current Foreign Inflation Rate.d.The Home Currency Will Depreciate If The Current Home Inflation Rate Exceeds The Current Foreign Interest Rate.

. Consider an economy with a fixed exchange rate, S. Through the problem, assume that the foreign interest rate, r ∗ , remains constant. (a) Suppose that financial market participants believe that the government is committed to a fixed exchange rate. What is the expected exchange rate? According to the (uncovered) interest parity condition, what is the domestic interest rate?

Which of the following will lead to a depreciation of the foreign currency with respect to the domestic currency?Group of answer choicesThe domestic interest rate is relatively lower than the foreign interest rate.The domestic growth rate is lower than the foreign growth rate from the financial account’s perspective.The domestic inflation rate is relatively lower than the foreign inflation rate.The domestic growth rate is higher than the foreign growth rate from the current account’s perspective.Next