Identify the primary actor in the European money market and briefly outlineits main role as participant. Identify also the four primary participants in the foreignexchange market.(b) Suppose that the European Central Bank had the view that the euro is overvalued relative to the dollar (i.e., the nominal exchange rate between the dollar and theeuro, E$/AC, is too high). How should the European Central Bank regulate the Europeannominal money supply to achieve a depreciation of the euro relative to the dollar?(c) Suppose that the dollar interest rate is 3% and the euro interest rate is 0.5%per year and that the interest parity condition holds in the dollar/euro foreign exchangemarket.(i) Explain the relationship between the interest rate difference and the expected appreciation of the euro against the dollar. By how many percentage is the euro expectedto appreciate?(ii) Suppose that the expected future exchange rate is Ee$/AC= 2.05. Obtain the currentequilibrium exchange rate that satisfies the interest rate parity condition.(d) Figure 3 on the next page shows the average money growth and inflation inWestern hemisphere developing countries, by year, between 1987 to 2014. Discuss whatempirical regularity is illustrated in the figure and how it is related to the adjustment ofprices in the long-run equilibrium of the money market.
Identify the primary actor in the European
its main role as participant. Identify also the four primary participants in the foreign
exchange market.
(b) Suppose that the European Central Bank had the view that the euro is overvalued relative to the dollar (i.e., the nominal exchange rate between the dollar and the
euro, E$/AC
, is too high). How should the European Central Bank regulate the European
nominal money supply to achieve a
(c) Suppose that the dollar interest rate is 3% and the euro interest rate is 0.5%
per year and that the interest parity condition holds in the dollar/euro foreign exchange
market.
(i) Explain the relationship between the interest rate difference and the expected appreciation of the euro against the dollar. By how many percentage is the euro expected
to appreciate?
(ii) Suppose that the expected future exchange rate is Ee
$/AC
= 2.05. Obtain the current
equilibrium exchange rate that satisfies the interest rate parity condition.
(d) Figure 3 on the next page shows the average money growth and inflation in
Western hemisphere developing countries, by year, between 1987 to 2014. Discuss what
empirical regularity is illustrated in the figure and how it is related to the adjustment of
prices in the long-run equilibrium of the money market.
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