How would covered interest arbitrage impact the bond

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Reference no: EM13223837

A 1 year US treasury bond yields 0.5% (0.005 as a decimal), and the 1-year euro bond rate is 1.0%. If the current spot rate is € .7565/ $ , and the current 1-year forward rate is €.7465, then which investment offers the highest return? How would covered interest Arbitrage impact the bond, spot and forward markets?

C=200 + .8YD

I= 500

G= 1100

NX=800 - 0.2Y

YD= Y - .25Y + 125

A) Find equilibrium Y in the basic Keynesian model.

B) What are the values of BS and NX at the equilibrium level of Y?

C) Find the value of savings at equilibrium Y.

Reference no: EM13223837

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