For this question, assume that interest parity holds, the future expected exchange rate is constant, the current nominal exchange rate is 1.2, the one-year foreign interest rate is 6% and the one-year domestic interest rate is 3%. Given this information, one can conclude that
A) financial market participants expect that the exchange rate (E) will increase by 3% over the coming year.
B) financial market participants expect that the exchange rate (E) will decrease by 3% over the coming year.
C) financial market participants expect that the domestic currency to depreciate by 3% over the coming year.
D) financial market participants expect that the exchange rate (E) will increase by 20% over the coming year.
A
You might also like to view...
Which of the following statements is true of a flexible exchange rate system?
A) Market forces tend to undervalue a currency over time. B) Market forces tend to overvalue a currency over time. C) Market forces do not affect exchange rates between different currencies. D) Market forces tend to push the exchange rate of a currency to market clearing levels over time.
The lower the nominal interest rate, the
A) greater the quantity of money supplied. B) greater the demand for money. C) smaller the demand for goods and services. D) smaller the quantity of money demanded. E) greater the quantity of money demanded.