Using the UIP equation, what would happen to the spot rate for euros if the interest rate on U.S. dollar deposits rises ceteris paribus?
a. The spot rate to purchase euros would rise (dollar depreciation).
b. The spot rate to purchase euros would fall (dollar appreciation).
c. The spot rate to purchase euros would be unchanged.
d. The U.S. Federal Reserve would have to raise U.S. short-term interest rates.
Ans: b. The spot rate to purchase euros would fall (dollar appreciation).
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