I know it’s late but I’m looking at what seems to be the easiest question every but somehow got it wrong. The 1st EOC question for reading 19 of the CFA curr. says that if country A’s int rates are greater than B’s then A’s exchange rate is expected to depreciate…wha…? If A’s int rates are higher wouldn’t that attract foreign investment and thus APPRECIATE the domestic currency? I do not understand. Please help shed some light! Thanks.
What you’re referring to is an increase in real interest rates. What the text is referring to is nominal interest rates.
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It depends on if the rates stated are net of inflation ( i.e. real rates ) or nominal rates . Nominal higher rates could mask even higher inflation , which could result in A’s currency depreciation due to loss of PPP
ahhhh, that’s right. I oversaw that. Thanks!