To answer the following question, please refer to the figure ...

[ec501234]

To answer the following question, please refer to the figure below. Concentrating only at the upper right quadrant, discuss the foreign exchange market equilibrium.
 
  What will be an ideal response?

Question 2

When a multinational affiliate replicates production in a foreign country it is called ________ foreign direct investment.
 
  A) horizontal
  B) vertical
  C) transitional
  D) bisectional
  E) direct

[raili21]

Answer to Question 1

The upper right quadrant describes the equilibrium in the foreign exchange market.
We begin with the Interest Parity Condition.
R = + ( - )/
In general, two effects are present:
 and  
A rise in the interest rate normally creates an excess demand for dollar deposits and appreciation in the currency market.
However, in this case the increase is due to higher expected inflation or higher expected monetary growth in the U.S. which implies a faster expected depreciation of the dollar against the euro, , thus, goes up and thus reduced the attractiveness of U.S. deposits.

Answer to Question 2

A

[ec501234]

Thank you

[raili21]

Happy to help you