An exchange rate cn'sis occurs when the peg (the xed exchange rate) loses its credibility Bond holders no longer believe that next period's exchange rate will be this period's exchange rate. The uncovered interest rate parity equation used is the approximation: ,, (Elan ' Er) i, a ir El 1 2 0.6 0.60 2 2 0.6 0.55 3 2 0.6 0.55 4 2 0.6 0.60 5 10.70% 2 0.6 0.50 6 2 0.5 0.50 Solve the uncovered interest rate parity condition for the value of the domestic interest rate in period 1. n period 1, it = %. (Round answer to 1 decimal place as needed) n period 2, the crisis begins. Solve the unoovered interest rate parity condition for the value of the domestic interest rate in period 2. Click to select your answer(s). In period 2, the crisis begins. Solve the uncovered interest rate parity condition for the value of the domestic interest rate in period 2. In period 2, ft = %. (Round answer to 1 decimal place as needed) The crisis continues in period 3. However, in period 4, the central bank and government resolve the crisis. How does this occur'? 0 A. The central bank and the government appreciated the current nominal exchange rate. This changed expectations regarding future rates. 0 B. The central and the government increased interest rates considerably in periods 3 and 4. O C. The central bank and the government devalued the current nominal exchange rate. This changed expectations regarding future rates. 0 D. There is a change in expectations regarding the future exchange rate meaning people believe the pegged rate is credible. Unfortunately, in period 5, the crisis returns bigger and deeper than ever. Notice from the chart that the interest rate in period 5 is set at 10.70%. Has the central bank set interest rates appropriately to maintain uncovered interest rate parit What are the consequences for the level of foreign exchange reserves? 0 A. Yes, they raised the rate the exact correct amount, this will result in no change in the level of foreign exchange reserves. 0 B. No, they need to raise the interest rate even higher. This will result in foreign exchange reserves increasing. 0 C. No, they need to raise the interest rate even higher. This will result in foreign exchange reserves decreasing. O D. No, in fact they raised the rate too much, it needs to be set equal to the foreign interest rate. This will result in foreign exchange reserves decreasing. Click to select your answer(s). Unfortunately, in period 5, the crisis returns bigger and deeper than ever. Notice from the chart that the interest rate in period 5 is set at 10.70%. Has the central bank set interest rates appropriately to maintain uncovered interest rate parity? What are the consequences for the level of foreign exchange reserves? 0 A. Yes. they raised the rate the exact correct amount, this will result in no change in the level of foreign exchange reserves. 0 B. No, they need to raise the interest rate even higher. This will result in foreign exchange reserves increasing. 0 C. No, they need to raise the interest rate even higher. This will result in foreign exchange reserves decreasing. O D. No, in fact they raised the rate too much, it needs to be set equal to the foreign interest rate. This will result in foreign exchange reserves decreasing. How is the crisis resolved in period 6'? Does this have implications for the future credibility of the central bank and the government? 0 A. There was an appreciation of the current nominal exchange rate. This will make it difcult for the government and central bank to convince everyone that they will not devalue again in the future. 0 B. Expectations regarding future exchange rates adjusted. Since expectations adjusted without any government intervention the future credibility of the central bank and the government is not impacted. O C. There was a devaluation of the current nominal exchange rate. This will make it difficult for the government and central bank to convince everyone that they will not devalue again in the future. Click to select your answer(s)