For this question,assume that the domestic interest rate is 8% and that the foreign interest rate is 6%.And finally,assume that the domestic currency is expected to depreciate by 3% during the coming year.Given this information,we know that
A)individuals will only hold domestic bonds.
B)individuals will only hold foreign bonds.
C)individuals will be indifferent about holding domestic or foreign bonds.
D)the interest parity condition holds.

Question

Quizplus · Accepted Answer

The domestic interest rate (8%) minus the expected depreciation of the domestic currency (3%) results in a net return of 5% on domestic bonds, which is less than the foreign interest rate of 6%. Therefore, individuals will prefer holding foreign bonds.

For This Question,assume That the Domestic Interest Rate Is 8