If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, then

Question

Quizplus · Accepted Answer

The correct choice is C because if the dollar interest rate is 10 percent and the euro interest rate is 6 percent, an investor would be indifferent between investing in dollars or euros if the expected dollar depreciation against the euro is exactly 4 percent. This is because the higher interest rate in dollars (10%) would be offset by the expected depreciation of the dollar against the euro (4%), making the effective return of investing in both currencies equal.

If the Dollar Interest Rate Is 10 Percent, the Euro