Suppose the domestic interest rate is 15%, the foreign interest rate is 11%, and the domestic currency is expected to depreciate by 3%.What is the adjusted interest rate differential?
A)1% in favor of the home country
B)1% in favor of the foreign country
C)4% in favor of the home country
D)4% in favor of the foreign country
E)7% in favor of the home country

Question

Quizplus · Accepted Answer

The adjusted interest rate differential is calculated by taking the domestic interest rate and subtracting both the foreign interest rate and the expected depreciation of the domestic currency. So, 15% - 11% - 3% = 1% in favor of the home country.

Suppose the Domestic Interest Rate Is 15%, the Foreign Interest