The nominal interest rate in the US and the Eurozone are equal to 2%. The expected exchange rate is E $/ϵ
e
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=1.2. Based on this, (a) Determine the spot exchange rate E $/ϵ
​
. (b) Determine the spot exchange rate E $/ϵ
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assuming that the Eurozone imposes a capital control of 1% on capital outflows. 1
Compare your answer with the one in part (a). What happens with the spot exchange rate when the capital control is imposed? Provide economic intuition for your answer.