When one country has higher nominal interest rates than another country,the high-interest-rate currency is expected to ________ relative to the low-interest-rate currency.
A)depreciate
B)appreciate
C)stay constant
D)None of the above

Question

Quizplus · Accepted Answer

Higher nominal interest rates generally lead to higher inflation rates, which in turn leads to a decrease in the value of the currency. Investors will typically seek to invest where the return on investment is higher, leading to an increase in demand for the high-interest-rate currency, but this increased demand is usually not enough to offset the effect of higher inflation rates. As a result, the high-interest-rate currency is expected to depreciate relative to the low-interest-rate currency.

When One Country Has Higher Nominal Interest Rates Than Another