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Question 3: (9 points) The Market of Foreign Exchange Rate and Interest Rate Differential The...

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Question 3: (9 points) The Market of Foreign Exchange Rate and Interest Rate Differential The U.K. pound is trading at 2 U.S. dollars per U.K. pound. There is purchasing power parity at this exchange rate. The interest rate in the United States is 3 percent a year and the interest rate in the United Kingdom is 7 percent a year. a. Calculate the U.S. interest rate differential. b. What is the US$ expected to be worth in terms of British pounds one year from now? Explain your answer. C Which country more likely has lower productivity? How can you tell? Use graphs to explain your answer. d. In which exchange rate models do forecasters trust? Use equations to explain your

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