Author Question: If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then A) an ... (Read 207 times)

kfurse · **on:** Jun 30, 2018

If the dollar interest rate is 10 percent and the euro interest rate is 6 percent, then

A) an investor should invest only in dollars if the expected dollar depreciation against the euro is 8 percent.
B) an investor should invest only in euros if the expected dollar depreciation against the euro is 8 percent.
C) an investor should be indifferent between dollars and euros if the expected dollar depreciation against the euro is 8 percent.
D) an investor should invest only in dollars.
E) an investor should invest only in euros.

Question 2

Explain how BOP disequilibrium is restored under

(a) flexible exchange rates.
(b) fixed exchange rates, after you define what a BOP disequilibrium means.

leahchrapun · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

(a) It is restored by exchange rate changes causing traded good price changes.
(b) By allowing a devaluation or using trade restrictions or else central banks must finance deficits.