If British government bonds pay a higher interest rate than U.S.government bonds, the dollar should appreciate.

Question

Quizplus · Accepted Answer

This statement is false. According to the interest rate parity theory, the exchange rate should adjust to eliminate any potential profit from investing in one currency and earning a higher interest rate, as opposed to investing in the other currency with a lower interest rate. Therefore, if British government bonds pay a higher interest rate than U.S. government bonds, the exchange rate should adjust in such a way that the potential profit is eliminated, preventing any appreciation of the dollar.

If British Government Bonds Pay a Higher Interest Rate Than