Given the following data:

Current US 1-year interest rate: 6%

Current exchange rate $1.00 = €0.90

Expected exchange rate one year from now: $1.00 = €0.85

a) What is the equilibrium Eurozone interest rate using the simplified UIRP formula equation (3.4)?

b)What is the equilibrium Eurozone interest rate using the full UIRP formula equation (3.1)?

c) Compute the cross-product term and show that it accounts for the difference between your answer to (a) and (b)

d) In the context of UIRP, could one or both countries have negative interest rates? In the example here, are any of the three variables given above likely to be bounded so as to prevent the interest rate on Euros becoming negative?