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1. What is the interest parity theory? Explain what would be the short run effect on...

1. What is the interest parity theory? Explain what would be the short run effect on the won/dollar exchange rate if the interest rate increased in the U.S but remained unchanged in Korea.

2. How does the asset approach explain the overshooting in nominal exchange rates that is often observed in foreign exchange markets today?

3. Let us assume the home central bank increases the money supply permanently. What will happen to nominal exchange rates both in the short run and in the long run? Explain.

4. Explain how an increase in domestic real GDP affects nominal exchange rates both in the SR and in the LR. Assume no change in expectations about future exchange rates.

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Expert Solution

Rahul Sunny answered 1 year ago
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