Question

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 %

Answer 1

Answer:

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