If the Nominal Interest Rates in the United States and Canada

question 134

Multiple Choice

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

• A) decrease by 8 percent.
• B) decrease by 4 percent.
• C) increase by 4 percent.
• D) increase by 5 percent.

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Definitions:

Eurobond

International bonds issued in multiple countries but denominated in a single currency (usually the issuer’s currency).

Foreign Bond

A bond issued in a country by a foreign entity, denominated in the issuing country's currency.

Absolute Purchasing Power Parity

A theory in economics that suggests that in the absence of transaction costs and official barriers, the price of identical products sold in different countries should be the same when translated to a common currency.

Trade Barriers

Measures implemented by governments to restrict international trade, often aimed at protecting domestic industries.