Need answer for this homeworkEcon 635 Name: ___________________________ Problem Set 6Fall 2019To obtain full credit, you need to show ALL your work. Feel free to work in groups, but the answers must be written up individually! Round your answers to two decimal places. 1. (5 points) Name 2 factors that affect the behavior of the (nominal) exchange rate (defined as euros per dollar) in the LONG run. Explain how a change in each of the factors will affect the exchange rate (whether it increases or decreases) and what happens to the value of the dollar relative to euro (i.e. does the dollar appreciate or depreciate?).2. (10 points) Name 2 factors that affect the behavior of the (nominal) exchange rate (defined as euros per dollar) in the SHORT run. Explain how a change in each of the factors will affect the exchange rate (whether it increases or decreases) and what happens to the value of the dollar relative to euro (i.e. does the dollar appreciate or depreciate?). Use the Foreign Exchange marketto GRAPHICALLY ILLUSTRATE your reasoning (don’t forget to label all axes, curves etc.) 3. (5 points) The president of the United States announces that he will increase inflation with his new pro-inflation program. If the public believes him, predict what will happen, holding everything else constant, to the exchange rate for the U.S. dollar (relative to other currencies) in the short run. Use the Foreign Exchange market to GRAPHICALLY ILLUSTRATE your reasoning (don’t forget to label all axes, curves etc.)4. (5 points) The current exchange rate is 0.93 euros per dollar, but experts believe the exchange rate will drop to 0.85 euros per dollar. What will be the percentage change in the exchange rate if experts are right? Will the euro (relative to $) appreciate or depreciate?5. (5 points) An investor in England purchased a 91-day US T-bill for $987.65 with a face value of $1,000. At that time, the exchange rate was $1.75 per pound. At maturity, the exchange rate was $1.83 per pound. What was the investor’s percentage holding period return (given that investor’s domestic currency is pounds)? In general, if investors expect the dollar to appreciate in the future, how will these expectations affect the demand for US assets and the current value of the US dollar? Is this in line with the Efficient Market Hypothesis? Explain briefly.

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