Author Question: Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return ... (Read 136 times)

123654777 · **on:** Jun 30, 2018

Is a depreciation of the dollar/euro exchange rate correlated with a decrease in the dollar return on U.S. deposits?

What will be an ideal response?

Question 2

When a multinational affiliate replicates elements of a production process in a foreign country it is called ________ foreign direct investment.

A) vertical
B) horizontal
C) transitional
D) bisectional
E) direct

kaylee05 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

No.
Assume that the Interest Parity is maintained, i.e.,
R = + ( - )/
Holding constant, one would expect a depreciation of the dollar/euro exchange rate (i.e. increase in ) to be correlated with a decrease in R, dollar returns on euro deposits. However, the higher expected inflation in the U.S. implies an increase in the , the expected future dollar to euro exchange rate. Thus, the quantity ( - )/ goes up and, increases despite a depreciation in the current dollar to euro exchange rate, .

Answer to Question 2

A