Consider the following formula £/$ Et st+1 £/$ £/$ St = if — it, - where st is the logarithm of the nominal exchange rate in period t defined as pounds per dollar, if is the short term interest rate in the UK and it is the short term interest rate in the US.

ENGR.ECONOMIC ANALYSIS
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ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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Solve the question given in the picture.

Consider the following formula
£/$
Et st+1
where St
£/$
St = if — it,
£/$ is the logarithm of the nominal exchange rate in period t defined
as pounds per dollar, it is the short term interest rate in the UK and it is the
short term interest rate in the US.
Transcribed Image Text:Consider the following formula £/$ Et st+1 where St £/$ St = if — it, £/$ is the logarithm of the nominal exchange rate in period t defined as pounds per dollar, it is the short term interest rate in the UK and it is the short term interest rate in the US.
3) If pt is positive, a risk neutral investor (investor who doesn't care about
risk) will
a) Borrow in the UK and invest in the US
b) Borrow in the US and invest in the UK
c) Insufficient information to answer the question
4) If pt is negative, a risk averse investor (investor who cares about risk) will
a) Borrow in the UK and invest in the US
b) Borrow in the US and invest in the UK
c) Insufficient information to answer the question
Transcribed Image Text:3) If pt is positive, a risk neutral investor (investor who doesn't care about risk) will a) Borrow in the UK and invest in the US b) Borrow in the US and invest in the UK c) Insufficient information to answer the question 4) If pt is negative, a risk averse investor (investor who cares about risk) will a) Borrow in the UK and invest in the US b) Borrow in the US and invest in the UK c) Insufficient information to answer the question
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