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State the new equilibrium spot exchange rate

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Reference no: EM133119161

Assume that initially the spot exchange rate is Edollar/euro=1.25 (i.e. the FX market is in equilibrium). Then the US central bank increases the interest rate from 1% to 2%.

What will happen to the domestic return schedule as a result?

What will happen to the foreign return schedule?

Calculate and state the new equilibrium spot exchange rate.

Reference no: EM133119161

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