If the interest rate is 1% in Japan and 9% in Australia, then:
A) we can expect the interest rates to equalize.
B) investors will buy Japanese bonds.
C) the yen will depreciate by 8%.
D) the yen will appreciate by 8%.

Question

Quizplus · Accepted Answer

According to the Interest Rate Parity theory, when there is a higher interest rate in one country than another, the currency of the country with the lower interest rate should appreciate against the currency of the country with the higher interest rate. Therefore, in this case, the yen is expected to appreciate by the difference between the two interest rates, i.e., (9%-1%) = 8%. Therefore, the correct answer is D.

If the Interest Rate Is 1% in Japan and 9