Market and the adjustment towards equilibrium

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Reference no: EM131166892

Suppose that Germany's interest rate is 8%, the Korean interest rate is 4%, the forward exchange rate is 1 euro per 30 Korean won, and the spot rate is 1 euro per 32 Korean won.

Questions:

1. Calculate how the spot exchange rate will adjust towards equilibrium, given that everything else stays constant.

2. Explain the mechanism that leads the market towards the equilibrium?

3. Graph this market and the adjustment towards equilibrium

Reference no: EM131166892

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