1. (5 points) Algebraically write the interest rate parity condition (approximation) using the following notation:

i= the interest rate in the home country

i* = the interest rate in the foreign country

R = the current spot exchange rate (remember that the exchange rate is the price in home currency of a unit of foreign currency)

F = the forward exchange rate

1. (10 points) Explain, in words, the logic of the condition -- the relationship between interest rate difference and spot and future exchange rates.

1. (10 points) Suppose that U.S. interest rates are 4 percent more than rates in the EU (HINT: treat the US as if it were the home country). Would you expect the dollar to appreciate or depreciate against the euro, and by how much?