Suppose the US interest rate is 6% and the Australian rate is 8%. If interest rate parity (IRP) holds, then the differential suggests the market expects the AUD to depreciate against the USD 1% per annum.

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the currency with the higher interest rate (AUD) will depreciate relative to the currency with the lower interest rate (USD) by the interest rate differential, which is 2% (8% - 6%). However, since the statement mentions a 1% depreciation, it implies a misunderstanding or miscalculation, but the concept of depreciation expectation is correct.

Suppose the US Interest Rate Is 6% and the Australian