Using the UIP Equation, What Would Happen to the Spot

question 17

Multiple Choice

Using the UIP equation, what would happen to the spot rate for euros if the interest rate on euro deposits rises, ceteris paribus?

• A) The spot rate to purchase euros would rise (dollar depreciation).
• B) The spot rate to purchase euros would fall (dollar appreciation).
• C) The spot rate to purchase euros would be unchanged.
• D) The U.S. Federal Reserve would have to raise U.S. short-term interest rates.

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Definitions:

Mead

An alcoholic beverage created by fermenting honey with water, sometimes with various fruits, spices, grains, or hops.

Utility Function

An economic model that describes how consumers rank different bundles or combinations of goods according to the level of satisfaction or utility they provide.

Equivalent Variation

A measure in economics that captures the change in wealth needed to maintain utility at a pre-change level after a price change.

Income

Money that an individual or business receives in exchange for providing labor, producing goods, or investing capital, over a certain period.