If UIP holds and the home currency is expected to appreciate by 4%, then the home interest rate is:
A) 6%.
B) 5%.
C) 4%.
D) Not enough information is provided to answer the question.

Question

Quizplus · Accepted Answer

The Uncovered Interest Parity (UIP) condition relates the expected change in exchange rates to the interest rate differential between two countries. Without knowing the foreign interest rate or the current exchange rate, we cannot determine the home interest rate solely based on the expected appreciation of the home currency.

If UIP Holds and the Home Currency Is Expected to Appreciate