Problem #2:

On the UIP Condition (0.75 points) Answer the following questions based on the UIP condition for the relationship between domestic and foreign interest rates that we studied in class.

1. (0.25 point) The interest rate on long-term savings accounts in the banking sector of Argentina is around 75% in January of 2021. An Argentine citizen is also allowed to invest as much as A$500,000 abroad in bank accounts in Europe (where A$ is used to denote the Argentine peso). The average interest rate for savings accounts in Europe is 5%. The Argentine resident claims that there is no way she should ship not even one peso to Europe. Is her reasoning correct? Explain under what conditions she would be right.

2. (0.25 point) If the domestic interest rate in the US is 2% and the interest rate in Europe is 1%, what can be expected for the exchange rate between the US dollar and the euro. Explain using the UIP formula.

3. (0.25 point) If the domestic interest rate in Brazil is 20% and the interest rate in Chile is 10%, what can be expected for the exchange rate between the Brazilian real and the Chilean peso. Explain using the UIP formula