An Increase in the Foreign One-Year Interest Rate Expected to Occur

question 12

Multiple Choice

An increase in the foreign one-year interest rate expected to occur in,say,two years will,all else fixed,have which of the following effects in a flexible exchange rate regime?

• A)The real exchange rate will decrease with no change in the nominal exchange rate.
• B)The nominal exchange rate will decrease with no change in the real exchange rate.
• C)Both the real and nominal exchange rate will decrease.
• D)No change in either the nominal or real exchange rate.
• E) Both the real and nominal exchange rate will increase.

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