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5. Assume that the spot exchange rate of the Euro is $1.20. The one-year interest rate is 5 percent in the United States and 3

5. Assume that the spot exchange rate of the Euro is $1.20. The one-year interest rate is 5 percent in the United States and 3 percent in Germany.

a. What will the spot rate be in one year according to the international Fischers effect (IFE)?

b. What is the force that causes the spot rate to change according to the international Fischers effect?

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