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Question: Suppose that i_NY = 2%, i_London = 6%, xa = -1%, and RP = 2%, where i_NY (i_London) denotes the interest rate in New York (London), xa denotes the expected appreciation of the foreign currency (i.e., the pound), and RP is the risk premium for undertaking an investment abroad. Explain clearly in your own words why this is a disequilibrium situation and what market forces will be at play to obtain uncovered interest parity.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M93136489

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