Suppose a Japanese bank offers a 4 per cent interest rate and Australian banks offer a 2 per cent interest rate. People must expect the yen to

Question

Quizplus · Accepted Answer

According to the interest rate parity theory, the difference in interest rates between two countries is offset by the expected change in exchange rates. Since the Japanese interest rate is 2% higher than the Australian rate, the yen is expected to depreciate by 2% to maintain parity.

Suppose a Japanese Bank Offers a 4 Per Cent Interest