In class, we use the dollar-euro exchange rate, E$/ to graph foreign exchange equilibrium. Lets use the yen-dollar exchange rate, EU/$, instead.

(a) Assuming that the expected future exchange rate is 105 yen per dollar, RU = 0.0001 and R$ = 0.0005, plot the curve for the expected yen return on dollar assets (deposits). What is the equilibrium exchange rate?

(b) Suppose the expected future exchange rate rises to 108.03. What is the new equilibrium exchange rate? Using a figure to show the equilibrium.