Reference no: EM132795081
a. According to Interest Rate Parity, how would the dollar respond (appreciate, depreciate, no change) against the Euro in reaction to an average European inflation rate of 2.2%? The US inflation rate is 4.2% in this example-the term in question is 1 year. Please use this data for a and
b. Consider the relationship between expansionary monetary policy. the value of the dollar, and net imports.
Question 1: How does expansionary monetary policy and this new dollar value impact net exports?
Question 2: Do these two work with each other in regards to economic growth? Explain. Suppose the current exchange rate is $1 buys .8374Euro, and key interest rates in the US are at 1% while they are at 3.25% in Europe.
Question 3: What is the expected exchange rate in the next period?
Question 4: If stock in the European stock market rises by 20%, what movement would need to occur to cause to lose money on transaction (when accounted for in dollars-the term in question is 1 year)?
Question 5: If the US Federal Reserve raises interest rates, how would you expect the Euro to move (appreciate or depreciate)?