Suppose that the U.S. interest rate is 5 percent and the Turkish interest rate is 50 percent. The effect of this difference in the foreign exchange market is that
A) financial capital stops moving.
B) an American investor is guaranteed to make an additional 45 percent in dollar terms by investing in Turkey.
C) investors expect the Turkish currency to rise in value (appreciate) against the dollar.
D) investors expect the Turkish currency to fall in value (depreciate) against the dollar.

Question

Quizplus · Accepted Answer

The significant difference in interest rates between the U.S. and Turkey suggests that investors would expect the Turkish currency to depreciate against the dollar. This expectation is based on the uncovered interest rate parity, which posits that higher interest rates in a country (in this case, Turkey) are often associated with an expected depreciation of that country's currency due to inflationary pressures, risk premiums, and adjustments in the foreign exchange market.

Suppose That the U