(a) Suppose that you live in Korea. Thus, the won is a domestic cur- rency, while the dollar is a foreign currency. Assume that the won interest rate is 5% and the dollar interest rate is 2%. The current exchange rate is W1,000 per dollar. Answer the following questions: a. The won is expected to depreciate against the dollar. Therefore, the expected exchange rate will be W1,030 per dollar a year later. If you are a holder of dollar deposits, what should you do?
(a) Suppose that you live in Korea. Thus, the won is a domestic cur- rency, while the dollar is a foreign currency. Assume that the won interest rate is 5% and the dollar interest rate is 2%. The current exchange rate is W1,000 per dollar. Answer the following questions: a. The won is expected to depreciate against the dollar. Therefore, the expected exchange rate will be W1,030 per dollar a year later. If you are a holder of dollar deposits, what should you do?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
![(a) Suppose that you live in Korea. Thus, the won is a domestic cur-
rency, while the dollar is a foreign currency. Assume that the won
interest rate is 5% and the dollar interest rate is 2%. The current
exchange rate is W1,000 per dollar. Answer the following questions:
a. The won is expected to depreciate against the dollar. Therefore,
the expected exchange rate will be W1,030 per dollar a year
later. If you are a holder of dollar deposits, what should you
do?
b. Experts believe that the expected exchange rate has been mis-
calculated. Given the interest rates and the current exchange
rate, find the expected exchange rate that satisfies the equilib-
rium condition for the foreign exchange market today.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F54db428d-1a70-438c-af8a-3c84a6e9cfe2%2F3de792cb-91e8-4d75-868b-42d502a656f3%2Fur1tl_processed.jpeg&w=3840&q=75)
Transcribed Image Text:(a) Suppose that you live in Korea. Thus, the won is a domestic cur-
rency, while the dollar is a foreign currency. Assume that the won
interest rate is 5% and the dollar interest rate is 2%. The current
exchange rate is W1,000 per dollar. Answer the following questions:
a. The won is expected to depreciate against the dollar. Therefore,
the expected exchange rate will be W1,030 per dollar a year
later. If you are a holder of dollar deposits, what should you
do?
b. Experts believe that the expected exchange rate has been mis-
calculated. Given the interest rates and the current exchange
rate, find the expected exchange rate that satisfies the equilib-
rium condition for the foreign exchange market today.
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