Question 3 is based on the following information: Assume that the... nominal exchange rate (E) is R1 = $0.20 expected exchange rate (at the end of the period Ee) is R1 = $0.20 domestic interest rate (i) is 6%% interest rate in the USA (i*) is 6%34 3. Which of the following statements are correct regarding the interest parity condition relation? a. The interest parity condition holds since the domestic interest rate approximately equals the foreign interest rate minus the expected rate of appreciation of the domestic currency. b. Assume that the domestic interest rate increases to 12%. If this happens, the interest parity condition no longer holds since the expected rate of return on domestic bonds is higher than that of foreign bonds. C. If the domestic interest rate increases from 6% to 12%, the current exchange rate will depreciate to re-establish the interest parity condition. d. If the domestic interest rate increases from 6% to 12%, the current exchange rate will appreciate to re-establish the interest parity condition. e. On the balance of payments side, a capital inflow occurs since there is a higher demand for rands on the foreign exchange market. This increase in the demand for rands results in an appreciation of the domestic currency. 1. a, b, c, and e 2. Only a, b and d 3. Only a, d and e 4. Only c and e 5. Only a, b, d and e
Question 3 is based on the following information: Assume that the... nominal exchange rate (E) is R1 = $0.20 expected exchange rate (at the end of the period Ee) is R1 = $0.20 domestic interest rate (i) is 6%% interest rate in the USA (i*) is 6%34 3. Which of the following statements are correct regarding the interest parity condition relation? a. The interest parity condition holds since the domestic interest rate approximately equals the foreign interest rate minus the expected rate of appreciation of the domestic currency. b. Assume that the domestic interest rate increases to 12%. If this happens, the interest parity condition no longer holds since the expected rate of return on domestic bonds is higher than that of foreign bonds. C. If the domestic interest rate increases from 6% to 12%, the current exchange rate will depreciate to re-establish the interest parity condition. d. If the domestic interest rate increases from 6% to 12%, the current exchange rate will appreciate to re-establish the interest parity condition. e. On the balance of payments side, a capital inflow occurs since there is a higher demand for rands on the foreign exchange market. This increase in the demand for rands results in an appreciation of the domestic currency. 1. a, b, c, and e 2. Only a, b and d 3. Only a, d and e 4. Only c and e 5. Only a, b, d and e
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 3 is based on the following information:
Assume that the...
nominal exchange rate (E) is R1 = $0.20
expected exchange rate (at the end of the period Ee) is R1 = $0.20
domestic interest rate (i) is 6%%
interest rate in the USA (i*) is 6%34
3.
Which of the following statements
are correct regarding the interest parity condition
relation?
a.
The interest parity condition
holds since the domestic interest rate
approximately equals the foreign interest rate minus the expected rate of
appreciation of the domestic currency.
b.
Assume that the domestic interest rate increases to 12%. If this happens, the interest
parity condition no longer holds since the expected rate of return on domestic bonds
is higher than that of foreign bonds.
C.
If the domestic interest rate increases from 6% to 12%, the current exchange rate will
depreciate to re-establish the interest parity condition.
d.
If the domestic interest rate increases from 6% to 12%, the current exchange rate will
appreciate to re-establish the interest parity condition.
e.
On the balance of payments side, a capital inflow occurs since there is a higher
demand for rands on the foreign exchange market. This increase in the demand for
rands results in an appreciation of the domestic currency.
1.
a, b, c, and e
2.
Only a, b and d
3.
Only a, d and e
4.
Only c and e
5.
Only a, b, d and e
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