If the interest rate is 4% on euro deposits and 2% on dollar deposits, while the euro is trading at...

1. The Federal Reserve purchases $1,000,000 of foreign assets for $1,000,000. Show the effect of this open market operation using T-accounts.

2. Again, the Federal Reserve purchases $1,000,000 of foreign assets. However, to raise the funds, the trading desk sells $1,000,000 in T-bills. Show the effect of this open market operation using T-accounts.

3. If the interest rate is 4% on euro deposits and 2% on dollar deposits, while the euro is trading at $1.30 per euro, what does the market expect the exchange rate to be one year from now?