If interest rates are higher in Italy than in Canada, the market expects that the lira will:
A)Appreciate against the Dollar
B)Depreciate against the Dollar
C)Offer a higher real rate of return than the Dollar
D)Be selling at a forward discount

Question

Quizplus · Accepted Answer

When interest rates are higher in one country compared to another, investors tend to move their money to that country to earn higher returns. This increases the demand for its currency, causing the currency to appreciate. However, in this case, the question is asking about the expected movement of the lira against the dollar. If interest rates in Italy are higher than in Canada, it suggests that investors will favor the lira over the Canadian dollar, causing demand for the lira to increase, and hence, its value to appreciate against the Canadian dollar. Therefore, the answer is B, i.e., the lira will depreciate against the dollar.

If Interest Rates Are Higher in Italy Than in Canada