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Examine the effect of changes in interest rates

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We noted that we could have developed our diagrammatic analysis of foreign ex- change market equilibrium from the perspective of Europe, with the euro/dollar exchange rate E€/$(= 1/E$/€) on the vertical axis, a schedule vertical at R€ to indicate the euro return on euro deposits, and a downward-sloping schedule showing how the euro return on dollar deposits varies with E€/$. Derive this alternative picture of equi- librium and use it to examine the effect of changes in interest rates and the expected future exchange rate. Do your answers agree with those we found earlier?

Reference no: EM13868749

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