According to the monetary approach,expectation can play a major role in the determination of exchange rate.If between US and EMU there is a significant interest rate differential (US interest rate is significantly higher than the EMU interest rate) but at the same time dollar is also expected to depreciate in the future by more than the positive interest differential,then which of the following is most likely to happen?
A) Dollar will depreciate
B) Dollar will appreciate
C) There will be a significant increase in the supply of Euro in the US
D) There will be a significant decrease in the demand for Euro
Correct Answer:
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