Assume the interest parity condition holds and that individuals expect the dollar to appreciate by 5% during the coming year.Given this information,we know that

Question

Quizplus · Accepted Answer

If individuals expect the dollar to appreciate by 5%, then the interest rate in the foreign country needs to be higher by less than 5% to compensate for the expected exchange rate gain. Therefore, the interest rate in the domestic country must be lower than the foreign interest rate, i < i*. Thus, choice B is correct.

Assume the Interest Parity Condition Holds and That Individuals Expect