Question
Assume that the U.S. interest rate on 1-year deposits is 2% and the Japanese interest rate on 1-year deposits is 2%. i.e. R$= R= 0.02.
Assume that the U.S. interest rate on 1-year deposits is 2% and the Japanese interest rate on 1-year deposits is 2%. i.e. R$= R= 0.02. The expected exchange rate between the yen and the USD one year from now is Ee/$ = 115.70.
- If FX markets are in equilibrium (i.e. UIP holds), what is the current yen/USD spot exchange rate (E/$)?
- Suppose the Bank of Japan temporarily raises the interest rate from 2% to 3% (assume exchange rate expectations remain constant). How does this affect the equilibrium yen/USD spot rate? Calculate the new yen/USD spot rate. Show your results graphically using a foreign exchange market equilibrium diagram
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Elementary Statistics
Authors: Robert R. Johnson, Patricia J. Kuby
11th Edition
978-053873350, 9781133169321, 538733500, 1133169325, 978-0538733502
