The real foreign exchange rate will ________ if _________ decreases.
A) decrease; the interest rate differential between domestic and foreign interest rates
B) increase; the interest rate differential between domestic and foreign interest rates
C) increase; the average foreign exchange trader's opinion of what the exchange rate should be if there were no interest rate differentials
D) not be affected; the average foreign exchange trader's opinion of what the exchange rate should be if there were no interest rate differentials

Question

Quizplus · Accepted Answer

The real foreign exchange rate will increase if the interest rate differential between domestic and foreign interest rates decreases. This is because a smaller interest rate differential makes domestic investments relatively more attractive, increasing demand for the domestic currency and thus increasing its value relative to foreign currencies.

The Real Foreign Exchange Rate Will ________ If _________ Decreases

The Real Foreign Exchange Rate Will If _ Decreases