1.Given the nominal exchange rate between the dollar and the euro to be $1.07 and that the inflation rate in the U.S is zero percent and in Europe is 2.5 percent. Find the real exchange rate. Has the dollar appreciated or depreciated in real terms? And by how much?

2.Given the following values of economic aggregates as a percentage of GNP in the U.S. Find the current account balance and the financial (capital) account balance assuming that statistical discrepancy is zero.

Unilateral Transfers = - 1.5%

Exports= 2.2%

Imports=4.3%

Investment=16%

Taxes=6%

Government Exp.=.7%

Private Saving.=12%

3.Assume that the U.S. interest rate is 5% and the Euro interest rate is 2% and that the future expected exchange rate in one year is $1.224. If the spot exchange rate is $1.16, find the expected dollar return on Euro deposits?

4.If UIP holds, the interest rate in the Eurozone is 10% and the dollar is expected to depreciate by 4%. What interest rate will prevail in the U.S?

5.Given the spot exchange rate of $1.15 and the forward exchange rate of $1.22 and that the interest rate in the U.S is 4% and in Europe is 2.5%. Find the covered interest differential in favor of the Eurobond? In which direction will capital flow?