The U.S.interest rate minus the foreign interest rate is called the U.S.interest rate differential.The U.S.interest rate differential would increase if
A) the U.S. interest rate decreases, and the foreign interest rate remains constant.
B) the U.S. interest rate decreases, and the foreign interest rate increases.
C) the U.S. interest rate increases, and the foreign interest rate increases.
D) the U.S. interest rate increases, and the foreign interest rate decreases.

Question

Quizplus · Accepted Answer

The U.S. interest rate differential would increase if the U.S. interest rate increases and the foreign interest rate decreases. This would make holding U.S. dollars more attractive compared to the foreign currency, leading to an increase in demand for U.S. dollars and a decrease in demand for the foreign currency. This would cause an appreciation of the U.S. dollar in the foreign exchange market.

The USinterest Rate Minus the Foreign Interest Rate Is Called the the U.S.interest