1) Flexible exchange rates, it was once thought, would bring more stability to the market. Instead, volatility and large fluctuations exist. If investors expected a decrease of 5% in interest rates for 3 years, but rates were only decreased 2% for years 2 and 3,

a) an appreciation

b) a depreciation

c) an appreciation

would occur.

2) In a flexible exchange rate regime, domestic and foreign interest rates are in parity. The central bank decides to reduce the current domestic interest rate from 6.00% to 3.50% for one year. The current exchange rate (rounded to the nearest percent) then decreases to

_______.