Question

In: Economics

6) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7...

6) With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is
A) 3 percent.
B) 10 percent.
C) 13.5 percent.
D) 17 percent.
7) The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar.
A) ratio
B) product
C) sum
D) difference
8) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent.
A) depreciation; 2
B) appreciation; 2
C) depreciation; 4
D) appreciation; 4
9) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.
A) depreciation; 2
B) appreciation; 2
C) appreciation; 4
D) depreciation; 4


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Solutions

Expert Solution

6, With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is the summation of 10 percent interent rate(return) and the expected appreciation of 7 pecent which is Option D) 17 percent.

7. The expected return on dollar deposits in terms of foreign currency can be written as the _Option C) Sum of the interest rate on dollar deposits and the expected appreciation of the dollar. As we have seen in question 6.

8) According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected Option B) appreciation of the foreign currency must be Option B) 2 percent. In interest rate parity is a situation in which the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency.

9) According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected Option A) depreciation of the foreign currency must be Option A) 2 percent. In interest rate parity is a situation in which the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency.


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