Question

USD/NZD 1.51 in nominal currency exchange rate terms. The same "The North Face" parka costs $230.00 in the U.S. and 320.00 New Zealand dollars in New Zealand. The U.S. Federal Reserve Bank decides to raise interest rates.

Based on the above scenario, please select the best answer choice below.

	I.	If the U.S. Federal Reserve Bank raises interest rates, this will make it that much less attractive for New Zealanders to purchase the same parka from the U.S. If the U.S. Fed raises interest rates, the difference between what New Zealanders expect to pay for the parka in New Zealand, and what the parka actually costs in New Zealand will widen, further confirming the fact that they are better off buying the parka in New Zealand to begin with.
	II.	If the U.S. Federal Reserve Bank raises interest rates, this will make it that much more attractive for New Zealanders to purchase the same parka in the U.S. If the U.S. Fed raises interest rates, the difference between what New Zealanders expect to pay for the parka, and what the parka actually costs in New Zealand will narrow, further confirming the fact that they are worse off buying the parka in New Zealand to begin with.
	III.	We don't have enough information to answer this question.
	IV.	If the U.S. Federal Reserve Bank raises interest rates, this will make it that much less attractive for New Zealanders to purchase the same parka in New Zealand. If the U.S. Fed raises interest rates, the difference between what New Zealanders expect to pay for the parka, and what the parka actually costs in New Zealand will widen, further confirming the fact that they are better off buying the parka in the U.S. to begin with.

Answer 1

Option II is correct

If US increase the interest rates, their exchange rate depreciates with respect to newzealand dollar. Hence, now they can buy more dollars with same newzealand dollar when compared to before the interest rates rised. This step increases the purchasing power of newzealand people if they want to buy in US