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Question: 17 does the behavior of the s exchange rate support...

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17. Does the behavior of the S- exchange rate support or contradict the theory of Uncov- ered Interest Parity? Answer with reference to the following Figure Dollar and euro 8 % interest rates 7 (% per year) Fed funds 6- rate, s 2F ECB refinancing 1 rate, is Exchange rate (S/e) $1.30 U.S. exchange rate, Esye (right axis) 1.20 | - 1.10 1.00 0.90 0.80 JanJan JanJanJJan 1999 2000 2001 2002 2003 2004 (a) Supports the theory of UIP. (b) Contradicts the theory of UIP. 18. Is the Fisher Effect more likely to hold in the short-run of the long-run? (a) In the short-run (b) In the long-run (c) Both in the short-run and the long-run (d) Cannot tell with given information.

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