Suppose That the Domestic Interest Rate Is 2% and That

question 66

Multiple Choice

Suppose that the domestic interest rate is 2% and that the foreign interest rate is 5%. Also assume that the domestic currency is expected to appreciate by 3% during the coming year. Given this information, we know that:

• A) individuals will only hold domestic bonds.
• B) individuals will only hold foreign bonds.
• C) individuals will be indifferent about holding domestic or foreign bonds.
• D) the interest parity condition holds.
• E) the purchasing power parity holds.

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