This is one big question with two parts
Homework Answers
a) Answers are given assuming Flexible exchange rate and Capital mobility.
Given here. Interest return in Indonesia= 8.05%, poland= 2.84% and Japan 0.01%
1) Indonesian Rupiah per Polish Zloty goes: Down
Reason: Since interest rate differential(8.05% - 2.84%) is in favour of Indonesia, there will be capital inflow in Indonesia. This will raise the demand of Indonesian Rupiah and leads to its appreciation. Due to appreciation,(increase in the value of currency), the exchange rate goes down.
2) Polish Zloty per yen goes: Down
Reason: Since interest rate differential(2.84%- 0.01%) is in favour of Indonesia, there will be capital inflow in Poland. This will raise the demand of Polish Zloty and leads to its appreciation. Due to appreciation,(increase in the value of currency), the exchange rate goes down.
3) Yen per Indonesian Rupiah: Goes up
Since interest rate differential(8.05% - 2.84%) is in favour of Indonesia, there will be capital outflow in Japan. There will be fall in the demand of Yen and leads to its Depreciation. Due to Depreciation,(fall in the value of currency), the exchange rate goes up.
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This is one big question with two parts
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