would push the exchange rate to the equilibrium rate you found. (3) Suppose the Fed conducts an open market operation in which it buys government bonds. Use the US financial markets diagram to show what this would do to US interest rates and the exchange rate. Explain why you shift any curve. 3. (1) Suppose that the domestic interest rate on a three month deposit is 5% and that the interest rate on a similar deposit in euroland is 10%. If the uncovered interest parity condition holds, what does the market predict will happen to the exchange rate (dollar price of euros)? Explain. (2) What is the difference between covered interest parity and uncovered interest parity? 4. Discuss the effects of a rise in the interest rate paid by euro deposits on the exchange rate. 5. What is "Asset Approach"? Please apply the concept of "Asset Approach" answer following questions (Explain your answer with diagram) (1) A fall in the Taiwan dollar interest rate how to affect NT$/US$ exchange rate? (2) A rise in the expected future exchange rate how to affect NT$/US$ exchange rate? 6. Suppose the following were true: U.S Dollar 12 month interest 2.25% rate Euro 2.70% Spot rate (3months) Forward rate(3months) (1) Does interest rate parity hold? (2) Which way will funds flow? 1.2017 $ / 1.19854 $ / (3) How will this affect exchange rates?