Suppose that the U.S. interest rate is 5 percent and the Turkish interest rate is 50 percent. The effect of this difference in the foreign exchange market is that

Question

Quizplus · Accepted Answer

According to the interest rate parity theory, a higher interest rate in one country relative to another leads to an expected depreciation of the first country's currency. Therefore, investors expect the Turkish currency to fall in value (depreciate) against the dollar due to the large difference in interest rates between the U.S. and Turkey. Choice B is incorrect as it proposes an appreciation of the Turkish currency. Choice C is incorrect as it is an oversimplification of the situation and does not take into account potential currency fluctuations. Choice D is incorrect as it assumes that all investors will chase after yield without considering other factors such as risk and liquidity.

Suppose That the U