1a. Suppose you are considering the purchase of a bond issued in another country. How would you determine the expected return on a foreign bond? Explain.

1b. Suppose the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate. What does this imply about the current versus future expected exchange rate? Explain.

1c. Using the data from State Bank of Pakistan and US Federal Reserve, determine the policy rates set by the respective central banks. Discuss how the depreciation of the Pakistani rupee had resulted in a hike in the policy rate in 2019 (you may look up the related statements on monetary policy and information compendium by SBP).

1d. Suppose the one-year nominal interest rate is 2.0% in the United States and 12.0% in Pakistan. Should you hold Pakistani bonds or U.S. bonds if the Pakistani rupee was to depreciate from Rs 155 to Rs 170 per dollar in one year? Explain.

2a. Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in taxes will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.

2b. Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect an increase in foreign output (Y*) will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria.

2c. Assuming the Marshall-Lerner condition holds and using the ZZ/Y and NX graphs, illustrate graphically and explain what effect a real appreciation will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria. Explain what the J-curve is and why it occurs.

2d. Plot the annual total exports and imports of Pakistan between 2011 and 2018? Discuss the relationship between real exchange rate and the trade deficit of Pakistan. Do you agree with the policy of maintaining an overvalued exchange rate? Discuss. You may use data on exports and imports from World Bank's World Development Indicators (WDI). Data on REER can be extracted from SBP's Economic Data website