According to interest rate parity, if the interest rate is 1 percent in the European Union and the euro is expected to appreciate 3 percent, the comparable interest rate in the United States will be
A) 4 percent.
B) 3 percent.
C) 2 percent.
D) 1 percent.

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the difference in interest rates between two countries is equal to the expected change in exchange rates between the countries' currencies. If the euro is expected to appreciate by 3 percent against the dollar and the interest rate in the European Union is 1 percent, then the interest rate in the United States must be 4 percent (1% EU interest rate + 3% expected appreciation of the euro) to maintain parity.

According to Interest Rate Parity, If the Interest Rate Is