the economics of money, banking, and financial markets

596 #

© 2014 Pearson Canada Inc.#

19.5 Appendix 1: The Interest Parity Condition

1. 
   

   The condition that states that the domestic interest rate equals the foreign interest rate minus
   the expected appreciation of the domestic currency is called ____.
   A) the purchasing power parity condition
   B) the interest parity condition
   C) money neutrality
   D) the theory of foreign capital mobility
   Answer: B
   Diff: 1 Type: MC Page Ref: 491
   Skill: Recall
   Objective List: Appendix: The Interest Parity Condition

   
   


2. 
   

   If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-
   denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the
   Frenchman the expected rate of return on dollar-denominated assets is ____.
   A) 11 percent
   B) 9 percent
   C) 5 percent
   D) 3 percent
   E) 1 percent
   Answer: B
   Diff: 1 Type: MC Page Ref: 491
   Skill: Recall
   Objective List: Appendix: The Interest Parity Condition

   
   


3. 
   

   If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-
   denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, the expected
   return on euro-denominated assets is ____.
   A) 7 percent
   B) 5 percent
   C) 1 percent
   D) 3 percent
   Answer: D
   Diff: 1 Type: MC Page Ref: 491
   Skill: Recall
   Objective List: Appendix: The Interest Parity Condition