Economic logic may tell us that a country with a higher interest rate, thus a higher rate of return, should be able to attract foreign capital and that a country with a lower interest rate, thus a lower rate of return, should experience an outflow of capital. If a country is experiencing a large net capital inflow its currency is likely to appreciate, while a country experiencing a large net capital outflow would likely see its currency depreciate (assuming a floating exchange rate). However, according to interest rate parity conditions a country with a higher interest rate would see its currency depreciate, while the currency of the lower interest rate country would appreciate. What is the main reason the outcome under interest rate parity conditions? Question 4 options: The assumption that countries have an identical real interest rate The relative interest rate level is not a factor for investment decisions Investors do not seek higher return Higher interest rates are a deterrent for investors while lower interest rates are favorable

Economic logic may tell us that a country with a higher interest rate, thus a higher rate of return, should be able to attract foreign capital and that a country with a lower interest rate, thus a lower rate of return, should experience an outflow of capital. If a country is experiencing a large net capital inflow its currency is likely to appreciate, while a country experiencing a large net capital outflow would likely see its currency depreciate (assuming a floating exchange rate). However, according to interest rate parity conditions a country with a higher interest rate would see its currency depreciate, while the currency of the lower interest rate country would appreciate. What is the main reason the outcome under interest rate parity conditions? Question 4 options: The assumption that countries have an identical real interest rate The relative interest rate level is not a factor for investment decisions Investors do not seek higher return Higher interest rates are a deterrent for investors while lower interest rates are favorable

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter6: An Introduction To The Foreign Exchange Market And The Balance Of Payments

Section: Chapter Questions

Problem 13E

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	The assumption that countries have an identical real interest rate
	The relative interest rate level is not a factor for investment decisions
	Investors do not seek higher return
	Higher interest rates are a deterrent for investors while lower interest rates are favorable