A constant differential between the interest rates of two countries over different terms to maturity implies that future changes in the exchange rate are expected to occur at a(n)________ rate.
A)constant
B)increasing
C)decreasing
D)None of the above

Question

Quizplus · Accepted Answer

A constant differential between the interest rates of two countries indicates that the market participants already expect the exchange rate to adjust in the future at a constant rate. Therefore, there is no reason to expect an increasing or decreasing rate.

A Constant Differential Between the Interest Rates of Two Countries