Lesson 3 Questions 3.1 Esie expected return on euro deposits Rates of return (in dollar terms) a) The curve drawn in the diagram above shows how the expected rate of return (in dollar terms) on a euro-denominated deposit varies with the dollar/euro exchange rate (Ese). The downward slope of the curve implies that, holding other determinants constant, a decrease in the current dollar/euro exchange rate is associated with an increase in the expected rate of return (in dollar terms) on a euro deposit. Explain in words (not just algebra) why that relationship exists and identify the other determinants which are being held constant along the curve shown above. (4 marks) Lesson 3 Questions 3.1 Esie expected return on euro deposits Rates of return (in dollar terms) a) The curve drawn in the diagram above shows how the expected rate of return (in dollar terms) on a euro-denominated deposit varies with the dollar/euro exchange rate (Ese). The downward slope of the curve implies that, holding other determinants constant, a decrease in the current dollar/euro exchange rate is associated with an increase in the expected rate of return (in dollar terms) on a euro deposit. Explain in words (not just algebra) why that relationship exists and identify the other determinants which are being held constant along the curve shown above. (4 marks)