Which of the following statements is true with respect to the monetary approach to the balance of payments:
A)the interest differential in favor of the dollar equals the expected rate of appreciation of the euro
B)the interest differential in favor of the dollar equals the expected rate of depreciation of the dollar
C)the interest differential in favor of the pound equals the expected rate of depreciation of the pound
D)all of the above

Question

Quizplus · Accepted Answer

The monetary approach to the balance of payments suggests that the interest rate differential between two currencies is equal to the expected rate of depreciation of the currency with the higher interest rate. This means all the given statements, which are variations of this principle applied to different currencies, are true.

Which of the Following Statements Is True with Respect to the Monetary