Suppose the interest rate in Canada rises and the interest rate in Japan remains the same. Interest rate parity implies that given equal risk,
A)the inflation rate is higher in Japan.
B)Japanese financial investments are less profitable.
C)the yen is expected to depreciate against the dollar.
D)the yen is expected to appreciate against the dollar.
E)Canadian financial investments are less profitable.

Question

Quizplus · Accepted Answer

According to interest rate parity, when the interest rate in one country increases, its currency is expected to appreciate relative to the currency of another country with a lower interest rate. Therefore, the yen is expected to appreciate against the dollar if the interest rate in Canada rises while the interest rate in Japan remains the same.

Suppose the Interest Rate in Canada Rises and the Interest