Pearson eText Economics of Money, Banking and Financial Markets, The, Business School Edition -- Instant Access (Pearson+)
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Chapter 20, Problem 2DAP
To determine

The solutions to the following questions using the source of the St. Louis Federal Reserves FRED database about the data on the exchange rates for the euro (DEXUSEU),British pound (DEXUSUK), and Japanese yen (DEXJPUS), and the data on the daily three-month London Interbank Offer Rate or LIBOR, for the United States dollar (USD3MTD156N), euro (EUR3MTD156N), British pound (GBP3MTD156N), and Japanese yen (JPY3MTD156N) where LIBOR is a measure of interest rates denominated in each country’s respective currency:

  1. Calculate the difference between the LIBOR rate in the United States and the LIOR rates in the three other countries using the data from one year ago and the most recent data available.
  2. Based on the changes in interest rate differentials, do you expect the dollar to depreciate or appreciate against the other currencies?
  3. Report the percentage change in the exchange rates over the past year. Are the results you predicted in part (b) consistent with the actual exchange rate behavior?

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