If in Chicago the interest rate is 5 percent a year and in Vancouver it is 4 percent a year, __________.
A) interest rate parity does not exist
B) the quantity of Canadian dollars purchased will increase
C) the U.S. dollar is expected to depreciate
D) the Canadian dollar is expected to depreciate

Question

Quizplus · Accepted Answer

The U.S. dollar is expected to depreciate because the higher interest rate in Chicago suggests that investors will demand more U.S. dollars to take advantage of the higher returns, leading to an expected depreciation of the U.S. dollar relative to the Canadian dollar.

If in Chicago the Interest Rate Is 5 Percent a Year