Suppose the interest rate in Canada falls 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 more 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

Interest rate parity implies that the expected change in the exchange rate is equal to the difference in interest rates between two countries. In this case, the interest rate in Canada has fallen, while the interest rate in Japan has remained the same. This means that the expected change in the exchange rate is for the yen to depreciate against the dollar.

Suppose the Interest Rate in Canada Falls and the Interest