Assume a one year U.S. bond pays 4.0 interest and a similar U.K. bond pays 5.2 interest. Which of the following changes will establish interest rate parity?
a. The British pound would be expected to appreciate by 1.2 against the U.S. dollar.
b. The U.S. dollar would be expected to depreciate by 1.2 against the British pound.
c. The British pound would be expected to depreciate by 1.2 against the U.S. dollar.
d. The British pound would be expected to appreciate by 9.2 against the U.S. dollar.
e. The U.S. dollar would be expected to appreciate by 9.2 against the British pound.
Question 2
Suppose that the exchange rate between Japanese yen and U.S. dollars is originally 130 yen to the dollar. If it then changes to 150 yen to the dollar, the price of U.S. goods to Japanese importers will:
a. rise.
b. fall.
c. stay the same.
d. change in an indeterminate direction.
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