Chapter 41, Problem 7MCQ

To determine

The correct option for the effect on the interest rate of country U and Country B.

Answer to Problem 7MCQ

Option c is correct.

Explanation of Solution

Explanation for the correct option:

c.

In the long run, there will be changes in country U and country B. In long run, there will be changes and due to interest rate parity among both countries, there will be a decrease in interest rate in country U and an increase in country B. Therefore, option c is correct.

Explanation for incorrect options:

a.

As per the interest rate parity condition, the interest rate of country U and Country B will move in opposite directions. Therefore, option a is the incorrect answer.

b.

The scenario will be different in long run according to interest rate parity. Therefore, option b is incorrect.

d.

The interest rate of country U will decrease but not of Country B. Therefore, option d is incorrect.

e.

There will be a change in interest rates in the long-run for both countries. Therefore, option e is incorrect.

Economics Concept Introduction

Foreign Exchange rate: The rate at which currencies of two different countries are exchanged. In other words, it is the rate at which one currency is exchanged with the other currency.