Discuss the effects of a rise in the interest rate paid by euro ...

[jeatrice]

Discuss the effects of a rise in the interest rate paid by euro deposits on the exchange rate.
 
  What will be an ideal response?

Question 2

Movements in GDP
 
  A) differ greatly from movements in GNP.
  B) do not differ greatly from movements in GNP.
  C) are not allowed to differ at all from movements in GNP by definition.
  D) need to be inflation adjusted in order to match movements in GNP.
  E) are not relevant to an examination of national income.

[frre432]

Answer to Question 1

There are two effects to consider. If we make the unrealistic assumption that the expected exchange rate will not change, then a rise in the interest rate paid by Euro deposits causes the dollar to depreciate. However, if the expected exchange rate were to rise, then the current exchange rate would also rise. (See Figure 14-6 from the text.)

Answer to Question 2

B