If USInterest Rates Are Expected to Be 6 Percent Next Year

question 147

Multiple Choice

If U.S.interest rates are expected to be 6 percent next year, European interest rates are expected to be 4 percent next year, and the spot rate between the euro and dollar is $1.30, then according to interest rate parity, we would expect the dollar to _________ against the euro from $1.30 to __________:

• A)appreciate, $1.275
• B)appreciate, $1.325
• C)depreciate, $1.275
• D)depreciate, $1.325

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Definitions:

Money Market Mutual Funds

Investment funds that invest in short-term debt securities, offering investors a high degree of liquidity and typically low risk.

M1 Money Supply

The measure of the most liquid components of the money supply, including currency in circulation and demand deposits in banks.

Checkable Deposits

Bank deposits that allow the account owner to write checks to third parties; debit cards can also access these deposits and transmit them electronically.

Nonbank Public

Refers to individuals and entities that are participants in the economy and financial system but do not include regulated banking institutions.