Homework Clinic
Social Science Clinic => Economics => Topic started by: saraeharris on Jun 30, 2018
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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?
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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.