Assume That the Interest Parity Condition Holds, the Future Expected

question 23

Multiple Choice

Assume that the interest parity condition holds, the future expected exchange rate is constant, the current nominal exchange rate is 2.2, the one- year foreign interest rate is 7% and the one- year domestic interest rate is 4%. One could conclude that:

• A) financial market participants expect that the exchange rate will increase by 4% over the coming year.
• B) financial market participants expect that the exchange rate will increase by 3% over the coming year.
• C) financial market participants expect that the exchange rate will decrease by 3% over the coming year.
• D) financial market participants expect that the exchange rate will decrease by 4% over the coming year.
• E) financial market participants expect the exchange rate to remain unchanged over the coming year.

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Definitions:

Increase

A rise or growth in quantity, size, intensity, or some other measure.

Population Density

The number of individuals of a species per unit of area or volume at a given time.

Individuals

Separate and distinct organisms or entities, often used in the context of discussing a single member of a species.

Natural Selection

The process by which traits become more or less common in a population due to consistent effects upon the survival or reproduction of their bearers.