If the interest rate on a comparable investment in Japan and Germany were 2 and 4 percent, respectively, then the Japanese yen would be expected to depreciate in value against the Euro.

Question

Quizplus · Accepted Answer

based on the interest rate parity theory, if the interest rate in Japan is lower than in Germany, the Japanese yen would be expected to depreciate against the Euro. This is because investors would be more likely to invest in Germany where they can earn a higher return, leading to a higher demand for Euros and a lower demand for Japanese yen. This increased demand for Euros would cause the value of the Euro to rise relative to the yen, resulting in the depreciation of the yen.

If the Interest Rate on a Comparable Investment in Japan