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6. Suppose the domestic interest rate it = io for any t. There will be a transitory increase in it+1 that will last for two periods, i.e., it+1 = +2 = io +. Otherwise it stays at io. Do the same analysis as in class to forecast the behavior of the exchange rate between US and Euro (number of dollars per euro) and draw the graphs of both the interest rate differential and the exchange rate. Consider two cases: (a) The t+1 shock is announced at time t (b) The t+1 shock is not announced at time t but it is a surprise

6. Suppose the domestic interest rate it = io for any t. There will be a transitory increase in it+1 that will last for two periods, i.e., it+1 = +2 = io +. Otherwise it stays at io. Do the same analysis as in class to forecast the behavior of the exchange rate between US and Euro (number of dollars per euro) and draw the graphs of both the interest rate differential and the exchange rate. Consider two cases: (a) The t+1 shock is announced at time t (b) The t+1 shock is not announced at time t but it is a surprise

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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6. Suppose the domestic interest rate it = io for any t. There will be a transitory increase in it+1 that will last for two periods, i.e., it+1 = +2 = io +. Otherwise it stays at io. Do the same analysis as in class to forecast the behavior of the exchange rate between US and Euro (number of dollars per euro) and draw the graphs of both the interest rate differential and the exchange rate. Consider two cases: (a) The t+1 shock is announced at time t (b) The t+1 shock is not announced at time t but it is a surprise
Transcribed Image Text:6. Suppose the domestic interest rate it = io for any t. There will be a transitory increase in it+1 that will last for two periods, i.e., it+1 = +2 = io +. Otherwise it stays at io. Do the same analysis as in class to forecast the behavior of the exchange rate between US and Euro (number of dollars per euro) and draw the graphs of both the interest rate differential and the exchange rate. Consider two cases: (a) The t+1 shock is announced at time t (b) The t+1 shock is not announced at time t but it is a surprise
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