Choose only one of the answers provided. Each question is worth 4 points. If you circle more than one you will be given zero points.

Consider the following formula.

Consider the following formula f/$ 1 - St f/'s = it it where st is the logarithm of the nominal exchange rate in period t defined as pounds per dollar, if is the short term interest rate in the UK and & is the short term interest rate in the US. 1) The formula above captures which theory? a) Purchasing Power Parity b) The International Trilemma c) Uncovered Interest Rate Parity d) The Theory of Comparative Advantage Consider augmenting the equation as follows: f /$ - St Etst-1 f/$ (if - 14 ) = Pt. 2) What is p,? a) The Fed Funds rate b) The equity premium c) The currency risk premium d) None of the above 3) If pt is positive, a risk neutral investor (investor who doesn't care about risk) will a) Borrow in the UK and invest in the US b) Borrow in the US and invest in the UK c) Insufficient information to answer the question 4) If p. is negative, a risk averse investor (investor who cares about risk) will a) Borrow in the UK and invest in the US b) Borrow in the US and invest in the UK c) Insufficient information to answer the question 5) If the exchange rate is pegged and the peg is credible (the UK adopts a currency board vis-a-vis the US) the following is truea) .0: = U bl Pt > 0 C) P: