Suppose the Domestic and Foreign Interest Rates Are Both Initially

question 66

Essay

Suppose the domestic and foreign interest rates are both initially equal to 3%.Now suppose the domestic interest rate rises to 5%.Explain what effect this will have on the exchange rate.Also explain what must occur for the interest parity condition to be restored.

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Definitions:

Fairness of the Bargain

The equitableness or justness of the terms agreed upon in a contractual agreement.

Lawful Purpose

A lawful purpose is an action, contract, or transaction that is not in violation of any legal statutes or regulations.

Quantum Meruit

Quantum meruit is a legal principle allowing a party to recover the reasonable value of services provided, even in the absence of a formal contract.

Promissory Estoppel

A legal doctrine preventing a person from going back on a promise, even if it was made without formal consideration, when others have relied on that promise to their detriment.