Business, 03.06.2021 20:00 Eylul30

Use the short-run asset approach to exchange rates. Given the following: expected US dollar/Euro exchange rate is $1.20 in one year; one year US interest rate is 2%; and one year Eurozone interest rate is 0%. a. What is the US dollar/Euro spot exchange rate?
b. If the expected exchange rate falls to $1.25 but interest rates remain the same, what is the US dollar/Euro spot rate?
c. With all other information as in a. If the interest rate in the US falls to 0%, what will be the US dollar/Euro spot exchange rate?
d. If the interest rate in the Eurozone falls to -2% with the US interest rate at 0%, and the expected exchange rate at $1.25, what will the spot exchange rate be?
e. What does the relationship between your answers to b and d tell you about the importance of interest rates in each currency zone?

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Use the short-run asset approach to exchange rates. Given the following: expected US dollar/Euro exc...

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