Interest rate differential and of the exchange rate

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It is announced today (time t) that the interest rate in Europe will be reduced by 1% for one period starting today (time t), and that it will increase back 1% a time t+1. If the interest rate in the USA remains unchanged at time t, what is the effect of the announcement on today's dollar-euro exchange rate (number of dollars per euro)? To answer this question follow the same steps as in class. Draw the graphs of the interest rate differential and of the exchange rate.

Reference no: EM133074412

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