(Answered) Let us suppose the rate of interest of a medium-sized open

Economics

Let us suppose the rate of interest of a medium-sized open economy with a flexible exchange rate is 5% and the foreign rate of interest of the dominant world economy is 7%. What does this imply about expectations in the foreign exchange market about the future movement of the exchange rate? What does open interest parity imply for the independence of monetary policy of our medium-sized open economy under a (i) flexible exchange rate regime and (ii) under a fixed exchange rate regime.

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