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Q. Explain why large interest rate differences would be strong evidence of unrealized gains from trade.
Answer: The difference between offshore and onshore interest rates on similar assets denominated in the same currency should be small if information about global investment opportunities is transmitted resourcefully. Data demonstrate that this is the case for the Germany, Japan, United States and the Netherlands.
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Q. Using the AA - DD framework, compare the effects of a rise in real domestic money demand under flexible and under fixed exchange-rate regimes. Answer: Under floating an i
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