Suppose the Domestic and Foreign Interest Rates Are Initially Equal

question 31

Essay

Suppose the domestic and foreign interest rates are initially equal to 5%. Now suppose the foreign interest rate rises to 7%. Explain what effect this will have on the exchange rate. Also explain what must occur for the interest parity condition to be restored.

---

Definitions:

East India Company

A historic English company formed for the exploitation of trade with East and Southeast Asia and India, incorporated by royal charter in 1600.

French and Indian War

A conflict in North America that was part of a global struggle between Britain and France (1754-1763), ending with the British victory and significant territorial gains in North America.

Interior Indian Tribes

Refers to indigenous groups who live within the interior regions of North America, away from the coastal areas.

Colonists' Relationship

Colonists' Relationship pertains to the interactions and connections between early European settlers in foreign territories and the indigenous populations, other colonists, or their home countries, often marked by trade, conflict, and cultural exchanges.