The covered interest rate parity condition can be stated as ...

[saraeharris]

The covered interest rate parity condition can be stated as follows: The interest rate on dollar deposits equals the interest rate on euro deposits ________ the forward ________ on dollars against euros.
 
  A) plus; discount
  B) minus; premium
  C) plus; premium
  D) minus; discount
  E) times; premium

Question 2

Use a figure to illustrate the ineffectiveness of monetary policy to spur on an economy under a fixed exchange rate.
 
  What will be an ideal response?

[tuwy]

Answer to Question 1

A

Answer to Question 2

The initial equilibrium rests at point 1. If the central bank wishes to use monetary policy to increase output from to , then they might buy domestic assets and shift the AA curve outward. However, the central bank must maintain a fixed exchange rate , so would have to sell foreign assets for domestic currency, returning the economy to point 1.