If the prices in the United States rise faster than those in other countries,
A) the exchange rate rises.
B) the exchange rate falls.
C) then interest rate parity must not hold.
D) the interest rate in the United States falls.

Question

Quizplus · Accepted Answer

When prices in the United States rise faster than those in other countries, U.S. goods become relatively more expensive. This decreases the demand for U.S. goods abroad and increases the demand for foreign goods in the U.S., leading to a higher supply of USD in the foreign exchange market to buy foreign currency, which typically results in the depreciation of the USD or a fall in the exchange rate.

If the Prices in the United States Rise Faster Than