Which of the following best describes the link between changes in a real interest rate and changes in an exchange rate? An increase in U.S. interest rates should produce
A) an inflated difference between the U.S. rate of interest and the rate applied in the rest of the world, leading to a self-fulfilling prophecy that the dollar will eventually depreciate.
B) a decline in worldwide rates, which in turn increases worldwide demand for the dollar; the exchange rate, the price of the dollar, therefore climbs.
C) inflation in the rest of the world and a corresponding appreciation in the value of the dollar.
D) any of the above, depending on the circumstance.
E) none of the above.

Question

Quizplus · Accepted Answer

An increase in U.S. interest rates should produce an inflated difference between the U.S. rate of interest and the rate applied in the rest of the world, leading to a self-fulfilling prophecy that the dollar will eventually depreciate.

Which of the Following Best Describes the Link Between Changes