Suppose a Japanese bank offers a 4 percent interest rate and U.S. banks offer a 2 percent interest rate. People must expect the yen to
A) depreciate by 2 percent.
B) appreciate by 2 percent.
C) depreciate by 6 percent.
D) appreciate by 6 percent.

Question

Quizplus · Accepted Answer

For investors to be indifferent between investing in Japan or the U.S. despite the higher Japanese interest rate, they must expect the yen to depreciate by the interest rate differential, which is 2 percent.

Suppose a Japanese Bank Offers a 4 Percent Interest Rate