4. (Ch. 20, Q6) Realignments of exchange rate Look at Figure 1 in the box The 1992 EMS Crisis. European nominal exchange rates had been fixed between the major currencies from roughly 1979 to 1992. 1.05 1.00 0.95 - 0.90 January 1992 = 1.00 0.85 0.80 T||| FINLAND SWEDEN UK ITALY SPAIN FRANCE PORTUGAL 0.75 0.70 Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov 1992 1993 Source: IMF database a. Explain how to read the vertical axis of Figure 1. What country experienced the largest depreciation? What country experienced the smallest depreciation? b. If two-year nominal interest rates in France and Italy had been similar in January 1992, which country would have generated the highest return on a two-year bond? c. If the changes in the nominal exchange rates returned countries to medium-run equilibrium, which countries had the largest overvaluations in 1992