If the expected proportionate change in the nominal exchange rate, measured in units of domestic currency per unit of foreign currency, is 2 % and the domestic interest rate is 6 %, then according to the uncovered interest parity condition, the foreign interest rate should be equal to:

Select one:

a. 6 % - 2 % = 4 %

b. 6 % + 2 % = 8 %

c. 6 % : 2 % = 3 %

d. 6 % x 2 % = 12 %

Question

Business

Aubree Mueller

11 April, 13:53

If the expected proportionate change in the nominal exchange rate, measured in units of domestic currency per unit of foreign currency, is 2 % and the domestic interest rate is 6 %, then according to the uncovered interest parity condition, the foreign interest rate should be equal to:

Select one:

a. 6 % - 2 % = 4 %

b. 6 % + 2 % = 8 %

c. 6 % : 2 % = 3 %

d. 6 % x 2 % = 12 %

+5

Answers (1)

Know the Answer?

Yasmin Shepherd · Answer 1

a. 6 % - 2 % = 4 %

Explanation:

Uncovered interest parity condition is that expected change in nominal interest rate equals difference between the interest rates.

domestic interest rate - foreign interest rate = expected change in nominal interest rate.

6 percent - foreign interest rate = 2 percent

So, foreign interest rate = 6 percent - 2 percent = 4 percent