Suppose interest parity holds.There is a change in U.S.policy that leads to expectations of a lower U.S.inflation rate.The decrease in expected inflation will cause dollar interest rates to _______.

Question

Quizplus · Accepted Answer

According to interest parity, the expected return on domestic and foreign assets should be equal. A lower expected inflation rate in the U.S. would lead to a decrease in the expected return on dollar-denominated assets. As a result, investors would demand a lower interest rate on dollar-denominated assets, causing the dollar interest rates to fall.

Suppose Interest Parity Holds