Answer:
Explanation:
In the given scenario, the dollar interest rate increases as the tax on interest rate earnings is removed, . Thus, the interest rate parity condition is given below:
iH = iF + Ee/E – 1, where “iH=dollar interest rate” and “iF= euro interest rate” and “E=spot dollar-euro exchange rate”.
“iH” increases supposing the tax is removed , and in order to maintain the equality, “E” must decrease. Therefore, dollar-euro exchange rate decreases, Export will also decrease and import will increase. The euro interest rate will remain the same.
