Just took Schweser mock 6 morning session. Q7-12
if us federal reserve restricts growth of money supply and foreign interest rate remains constant, then Intetest rate differentials should increase, thereby increasing the value of the dollar. Is this statement correct?
i understand that restrictive monetary policy will increase the country’s currency value. But if we are talking about interest rate differentials, the restrictive monetary policy will cause the interest rate in us to raise, given that the foreign country’s interest rate remains constant, the exchange rate (dc/fc) will increase according to interest rate parity. As a result, shouldn’t US dollar depreciate???