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6

0)Increaseddemandforacountrysexportscausesitscurrencytodepreciate.

Answer:FALSE

6

1)Astherelativeexpectedreturnondollardepositsincreases,Americanswillwantto

holdfewerdollardepositsandmoreforeigndeposits.

Answer:FALSE

6

2)Accordingtotheinterestrateparitycondition,ifthedomesticinterestrateis12

percentandtheforeigninterestrateis10percent,thentheexpectedappreciationof

theforeigncurrencymustbe2percent.

Answer:TRUE

6

3)Afallintheexpectedfutureexchangerateshiftstheexpectedreturnschedulefor

domesticdepositstotherightandcausesthe

domesticcurrencytodepreciate.

Answer:FALSE

1

2.3Essay

1)Explainthelogicunderlyingthelawofonep

riceandthetheoryofpurchasing

powerparity.

2)Explaingraphicallyhowachangeinthedom

esticpricelevelwillaffectexchange

rates,holdingeverythingelseconstant.

3)Explainthetheoryofinterestrateparity.

4)Explaingraphicallyhowachangeinthefore

igninterestratewillaffectexchange

rates.

5)Discusstherelationshipbetweenchangesindomesticrealandnominalinterestrates

andexchangerates.

6)Explaingraphicallyhowanincreaseinacou

ntrysmoneysupplywillaffectthe

exchangerateforitscurrency.

163

164