Say the home interest rate = 10%, the foreign interest rate = 10%, E = 2

a. What is Ee t+1 ?

b. Given R, R*, and the Ee t+1 from part a, what would happen to E if: In each case, calculate the numerical value of the exchange rate and say why it makes sense that the exchange rate moves that way. Also, for each one, reset the values of all the variables to the start. (that is, the changes are NOT cumulative).

i. E e t+1 changes to 2.2

ii. R goes up to 15%

iii. R* goes down to 5% iv. What if the risk on home bonds increases, such that before they were equally risky to foreign bonds, but are now considered 5% more risky

t+1 t+1