Using the UIP equation, what would happen to the spot rate for euros if the interest rate on euro deposits rises, ceteris paribus?
A) The spot rate to purchase euros would rise (dollar depreciation).
B) The spot rate to purchase euros would fall (dollar appreciation).
C) The spot rate to purchase euros would be unchanged.
D) The U.S. Federal Reserve would have to raise U.S. short-term interest rates.

Question

Quizplus · Accepted Answer

If the interest rate on euro deposits rises, the euro becomes more attractive to investors, leading to an increase in demand for euros. This would cause the spot rate to rise, meaning the dollar depreciates relative to the euro.

Using the UIP Equation, What Would Happen to the Spot