1. Describe the balance-of-payments identity and disuss its implications under the fixed and flexible exchange rate regimes.
2. Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate regime. Explain why this may be so.
3. Assume that interest rate parity holds. In the spot market 1 Japanese yen = $0.01158, while in the 90-day forward market 1 Japanese yen = $0.01159. In Japan, 90-day risk-free securities yield 1.6%. What is the yield on 90-day risk-free securities in the United States? Round your answer to two decimal places. Do not round intermediate calculations.