1. Hong Kong dollar is fixed against the U.S. dollar. When the Fed announces an increase in the interest rates, how would Hong Kong Monetary Authority respond, if the country wants to maintain the fixed exchange rate regime and free capital mobility?

a) They would decrease money demand

b) They would decrease interest rates

c) They would decrease price level

d) They would decrease money supply

2. Suppose you have $1500 to invest for one year, and the annual interest rate on a dollar account in the U.S. is 4%, the interest rate on a euro account in Europe is 5%, and the expected depreciation of the dollar over the year relative to the euro is -1%. Which investment is better?

a) dollar account

b) euro account

c) they are equivalent

d) cannot tell