Assume that the U.S. interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
A) depreciation in the Australian dollar's value over the next year.
B) appreciation in the Australian dollar's value over the next year.
C) no change in the Australian dollar's value over the next year.
D) Information on future interest rates is needed to answer this question.

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the currency of the country with a higher interest rate (Australia, in this case) is expected to depreciate against the currency of the country with a lower interest rate (the U.S.). This is because higher interest rates are often associated with higher expected inflation, which can decrease the currency's value.

Assume That the U