If interest-rate parity holds and the interest rate in Japan is 3 percent while in France it is 5 percent, then we would expect the yen per euro exchange rate to ______ percent.

Question

Quizplus · Accepted Answer

According to interest rate parity, the difference in interest rates between two countries is equal to the difference in their exchange rates. In this case, France's interest rate is higher than Japan's, so the euro should depreciate relative to the yen. The calculation is (5% - 3%) = 2%, so the euro should depreciate by 2%.

If Interest-Rate Parity Holds and the Interest Rate in Japan