If the domestic interest rate decreases, with the foreign interest rate and the expected future spot rate remaining unchanged, the value of the domestic currency vis-à-vis the foreign currency is expected to:
A)increase.
B)decrease.
C)remain unchanged.
D)converge to its PPP value.

Question

Quizplus · Accepted Answer

A decrease in domestic interest rates leads to a decrease in demand for the domestic currency by foreign investors and an increase in demand for foreign currency by domestic investors. This increase in supply of domestic currency and demand for foreign currency leads to a depreciation of the domestic currency value vis-à-vis the foreign currency.

If the Domestic Interest Rate Decreases, with the Foreign Interest