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:

Federal Income Tax

A fiscal duty assessed by the federal authority on the annual revenues of people, firms, trusts, and assorted legal entities.

FICA Rate

The total percentage of Social Security and Medicare taxes that must be paid by both employees and employers under the Federal Insurance Contributions Act.

Workers' Compensation Insurance

Insurance that provides wage replacement and medical benefits to employees injured in the course of employment.

Job-Related Injury

An injury or illness that occurs as a direct result of duties performed on the job, potentially eligible for worker's compensation benefits.