China’s nominal interest rates, along with the inflation rate, have been declining over the past five years as a result of governmental efforts to privatize state-owned enterprises and monetary austerity controls over its economy. Over the long run, the Chinese yuan would be expected to: A) depreciate relative to countries with high interest rates. B) appreciate relative to countries with low inflation. C) appreciate relative to countries with high interest rates. D) depreciate relative to countries with high inflation. Whatcha got?
I’ d say A
A for me as well
a
A
Your answer: A was incorrect. The correct answer was C) appreciate relative to countries with high interest rates. According to uncovered interest rate parity, countries with high nominal interest rates should experience a depreciation of their currency in the long run, while countries with low nominal interest rates should experience an appreciation of their currency in the long run. 
bull shhhhhhhhhhh
Ans: A A) depreciate relative to countries with high interest rates. - Yea!! B) appreciate relative to countries with low inflation. currency should depreciate relative to low inflation countries C) appreciate relative to countries with high interest rates. - lol D) depreciate relative to countries with high inflation. currency should appreciate relative to high inflation countries
dinesh lol it is LOL
florinpop Wrote: ------------------------------------------------------- > bull shhhhhhhhhhh my thoughts exactly…
florinpop Wrote: ------------------------------------------------------- > dinesh lol it is LOL shit!! how come LOL is the answer!!! … need to tear open the book now
I always forget this. Countries with high nominal rates will sell at a forward discount to prevent arbitrage . . .I think.
AS I see it high interest rates will atract deposits therefore appreciation of currency I thought they would mention something about interest rate parity in order for us to know
Exactly, thats why 100% of the time I get these questions wrong.
my thoughts where : High Interest Rates in US, will attract financial flow ‘into’ the country and hence the demand for USD would increase in the FX, raising the currency.
dinesh exactly … except if interest parity holds and then that means that the higher interest rates are balanced by depreciation in currency… but I was under the impression they would give you the interest parity assumption considering that it doesn’t really work most of the time
C, because countries with high inflation and interest rates’ currency tend to depreciate… just read this in econ yesterday 
c does not mention high inflation
I think its assumed under uncovered interest rate parity that high interest rates imply high inflation.
over the long run, countries with high interest rates should depreciate, the country relative to that should appreciate, especially if the has been decreasing rates.