Susan lives in the US and has $1000 to invest. Shehas to decide between buying a one year CD(certificate of deposit) from a bank in the US orone in France. The US CD, denominated in dollars,pays an interest rate of 3%, while French CD,denominated in Euro, pays an interest rate of 2%.The dollar-euro spot rate is 1.4 and the dollar-euro forward rate is 1.5. What should Susan do?

Here, we calculate the given as follow;

as to decide between buying a one year CD ertificate of deposit) from a bank in the US or ne in France. The US CD, denominated in dollars, ays an interest rate of 3%, while French CD, enominated in Euro, pays an interest rate of 2%.

as to decide between buying a one year CD ertificate of deposit) from a bank in the US or ne in France. The US CD, denominated in dollars, ays an interest rate of 3%, while French CD, enominated in Euro, pays an interest rate of 2%.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 23CTQ: Why would a nation dollarizeâ€”that is, adopt another countrys currency instead of having its own?

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Question

Susan lives in the US and has $1000 to invest. She
has to decide between buying a one year CD
(certificate of deposit) from a bank in the US or
one in France. The US CD, denominated in dollars,
pays an interest rate of 3%, while French CD,
denominated in Euro, pays an interest rate of 2%.
The dollar-euro spot rate is 1.4 and the dollar-
euro forward rate is 1.5. What should Susan do?

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