Assume that the uncovered interest parity holds and that the expected nominal exchange rate
is Ee = 1.3. What is the interest rate of the foreign economy?
6. (Extra credit, 5 points for the Exam) Assume that the government promotes an expansionary
fiscal policy by increasing government expenditure from G = 250 to G = 400. Find the new
values for Y , i, E, I and T B. Provide intuition for your results.2
2You do not need to answer this question in order to obtain full credit in this assignment.
3