From uncovered interest parity, we know that when the domestic interest rate is greater than the foreign one:
A) the domestic currency is expected to appreciate.
B) the domestic currency is expected to depreciate.
C) the foreign currency is expected to appreciate.
D) the foreign currency is expected to depreciate.

Question

Quizplus · Accepted Answer

According to uncovered interest parity, when the domestic interest rate is greater than the foreign one, investors will shift their funds to the foreign currency to earn a higher return. This increase in demand for the foreign currency will result in the domestic currency depreciating. Therefore, the correct answer is B, the domestic currency is expected to depreciate.

From Uncovered Interest Parity, We Know That When the Domestic