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Assume that there are substantial capital flows between Japan and Vietnam and the (risk free) interest rate in Japan is 2% while it is 4%
Assume that there are substantial capital flows between Japan and Vietnam and the (risk free) interest rate in Japan is 2% while it is 4% in Vietnam. However, suddenly, the interest rates in Japan and Vietnam equate (both 3%). What do you anticipate will happen to the spot price of the yen (Japanese currency) relative to the dong (Vietnamese currency)? Use the supply and demand model in Madura Ch. 4 to explain your answer.
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