Suppose the interest parity condition holds. Also assume that the one-year interest rate in the United States is 5% and that the one-year interest rate in Canada is 6%. What does this imply about the current versus future expected exchange rate (for the U.S. and Canadian dollars)? Explain

What will be an ideal response?


If the interest rate in US is less than the interest rate in Canada, we know that Canadian dollars must be expected to depreciate to equate the expected returns on the two bonds.

Economics

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