Assume a small open economy for which the uncovered interest rate parity condition consistently holds. Which of the following is true for domestic and foreign returns when seen from the perspective of the domestic economy? O The domestic return is equal to the domestic interest rate. The foreign return is equal to the foreign interest rate and the expected rate of depreciation. With a given, fixed expectation for the future exchange rate, the expected rate of depreciation will increase following a rise in domestic return. An expected x% depreciation of the domestic currency is equivalent to an x% return in foreign investments because income held in foreign currency will increase in value in domestic currency terms over the investment period.
Assume a small open economy for which the uncovered interest rate parity condition consistently holds. Which of the following is true for domestic and foreign returns when seen from the perspective of the domestic economy? O The domestic return is equal to the domestic interest rate. The foreign return is equal to the foreign interest rate and the expected rate of depreciation. With a given, fixed expectation for the future exchange rate, the expected rate of depreciation will increase following a rise in domestic return. An expected x% depreciation of the domestic currency is equivalent to an x% return in foreign investments because income held in foreign currency will increase in value in domestic currency terms over the investment period.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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