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
A) investors expect the Turkish currency to rise in value appreciate) against the dollar.
B) an American investor is guaranteed to make an additional 45 percent in dollar terms by investing in Turkey.
C) all funds flow to Turkey to get the higher interest rate.
D) investors expect the Turkish currency to fall in value depreciate) against the dollar.

Question

Quizplus · Accepted Answer

The difference in interest rates would lead investors to expect the higher yield in Turkey, but they would also factor in the risk of depreciation of the Turkish currency. Therefore, they would expect the Turkish currency to fall in value against the dollar, reducing their overall return when converted back into dollars. This would result in a decrease in demand for the Turkish currency and could lead to a depreciation in its value.

Suppose That the U