Suppose the Domestic Interest Rate Is 10%, the Foreign Interest

question 32

Multiple Choice

Suppose the domestic interest rate is 10%, the foreign interest rate is 12%, and the domestic currency is expected to appreciate by 4%. We should expect to see

• A) a capital inflow and a reduction in the foreign interest rate
• B) a capital inflow and a reduction in the domestic interest rate
• C) a capital outflow and a reduction in the foreign interest rate
• D) a capital outflow and an increase in the domestic interest rate
• E) a capital outflow and an increase in the foreign interest rate

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