Question: 1. Describe the different ways in which the government may intervene in the forex market. Why does the government have the ability to intervene in this way, while private actors do not?
2. Suppose quotes for the dollar-euro exchange rate E$/€ are as follows: in New York $1.50 per euro, and in Tokyo $1.55 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will affect the dollar price of the euro in New York and Tokyo.