What am I missing… Practice problems R13 #1… “Considering two countries, A&B, whose currencies are A & B respectively. The interest rate in A is greater than the interest rate in B. Which of the following is true according to the expected exchange rate movement relationship and interest rate parity relationship” It says that the currency in A is expected to depreciate vs the currency in B and trade with a forward discount but shouldn’t it be the other way around… If A has higher interest rates (and a presumably tighter monetary policy) shouldn’t there be greater demand for A$ from foreigners exchanging and investing in A? I am sure this is very simple and I am just looking at it the wrong way but can someone explain… I skimmed the chapter and from what I read, I should be correct. Thanks
nominal rate of A > nominal rate of B. But real rates are assumed to be equal. so Infl A > Infl B. So A would depreciate…
Adding to CP comments…real rates are equal based on fischer’s relationship…real rates are the same across all countries, hence any change in Nominal rates is due to changes in inflation.
Thanks for the explanation!