From uncovered interest parity, we know that when the domestic currency is expected to depreciate, the domestic interest rate should be:
A) greater than the foreign interest rate.
B) greater than the foreign exchange rate.
C) less than the foreign interest rate.
D) less than the foreign exchange rate.

Question

Quizplus · Accepted Answer

Uncovered interest parity suggests that if the domestic currency is expected to depreciate, investors will demand a higher interest rate on domestic assets to compensate for the expected loss in currency value. Therefore, the domestic interest rate should be greater than the foreign interest rate.

From Uncovered Interest Parity, We Know That When the Domestic