A. Assume that the nominal interest rate in Jordan is 10% and the nominal interest rate in Germany is 6%. The spot exchange rate of the Jordanian Dinar is 1 (JD/euro) and the forward rate is 1.3 (JD/euro). Calculate the forward discount or premium for the Jordanian Dinar. Does the interest parity condition hold? If not explain what is likely to occur in foreign exchange markets if interest rates cannot change.

B. A rise in the nominal exchange rate (/$) represents a depreciation of the pound relative to the dollar, but a rise in the real exchange rate (/$) represent an appreciation of the pound. Explain why this is true.

C. State four reasons for why might a group of countries wish to have a common currency?

1.

2.

3.

4.