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1. Suppose that the U.S. Federal Reserve suddenly decides to raise interest rates. Trace out the potential impact that this action might have on (1) interest rates abroad,

(2) the spot value of the dollar, and

(3) the forward value of the dollar.

2. Interest rates on risk-free bonds in the United States are about 2 percent, whereas interest rates on Swiss government bonds are 6 percent. Can we conclude that investors around the world will flock to buy Swiss bonds? Why or why not?

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