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Questions

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Chаpter 10 Fоrmulаs аnd Definitiоns All symbоls are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ********************************************* Use the notation in class: R (denominated in $/€) is the spot exchange rate of the euro, in dollars; and F (also denominated in $/€) is the forward exchange rate of the euro, in dollars. Suppose that R < F. Complete the sentence: The dollar is expected to __________ against the euro in the future; and nominal interest rates denominated in dollars in the U.S. tend to be __________ than nominal interest rates denominated in euros in Europe.