Under fixed exchange rate, in general
A) the domestic and foreign interest rates are equal, R = R*.
B) R = R + (Eᵉ - E)/E.
C) the foreign and domestic interest rates are unequal.
D) the expected rate of domestic currency depreciation is high.
E) the expected rate of currency depreciation is one.

Question

Quizplus · Accepted Answer

Under fixed exchange rate, the domestic and foreign interest rates are equal, R = R*. This is because the central bank intervenes in the foreign exchange market to maintain the fixed exchange rate, and adjusts domestic interest rates in response to changes in foreign interest rates to keep the exchange rate fixed.

Under Fixed Exchange Rate, in General