1. If the dollar begins trading at $1.30 per euro, with the same interest rates given in Problem 3, and the ECB raises interest rates so that the rate on euro deposits rises by 1 percentage point, what will happen to the exchange rate (assuming that the expected future exchange rate is unchanged)?
2. If the balance in the current account increases by $2 billion while the capital account is off $3.5 billion, what is the effect on governmental international reserves?
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