# Text Vol 5. P.297. Problem #5 (Reading 41)

Dear all, The last paragraph of the solution (P. A-24) to this problem said " The journal could also be suggesting that a currency with a higher interest rate tends to appreciate". Does anybody know why a currency with a higher interest rate tends to appreciate ? In level II, we learned that a currency with a higher interest rate shall depreciate, right ? Is it contrary to what we have learned ? Please kindly advise !

Are you studying at this hour? If so, I hope you’re on the West Coast. I don’t have my books so I can’t advise on this specific question, but interest rate parity states that the country with the higher interest rate should see their currency DEpreciate, as you stated. Of course, at this BAC I’m only 80% sure of this and I’m not googling it.

Hi, Banklin : Yes, I am studying now and I am going to finish this reading by doing the exercise. But I am not in US. Would you please kindly advise me after your reviewing this problem and its solution ? TKVM in advance.

I know this is a bit confusing. However, I believe the material is talkinga about the real-interest rate, not necessarily nominal interest rate. One of the underlying assumption in interest rate parity is the real interest rate are equal around the world. The country with higher real interest rate will see its currency appreciate.

ws, Yes, if the interest rate is the “real”, a currency with a higher “real” interest rate tends to appreciate". But as you said, a assumption under IRP is that real interest rate are equal around the world. Then, if the word “real” is not mentioned, we shall assume that the interest rate is nominal, right ? Actually, I can not understand the solution (P. A-24) to Problem #5 entirely. Anyone can help ?

I cant see the book right now but there are two concepts where we could see high interest rates (relative to another country) and the currency appreciating. The capital flows approach and the savings imbalance approach. I’m not sure if that’s what they’re referring too.