Question

If nominal interest rates in the U.S. rise, then the U.S. dollar will appreciate. Is this statement true, false, or uncertain? You will be graded solely on your explanation.

Answer 1

ANSWER : "If nominal interest rates in the U.S rise , then the U.S doller will appreciate "--- the statement is uncertain . U.S doller will be appreciate if the real interest rate increase . Real interest rate = nominal interest rate minus inflation rate . If nominal interest rate of U.S rise but inflation rate also rise same rate , then U.S doller will not appreciate because real interest rate will be zero . But if nominal interest rate increase in U.S but inflation rate is less than nominal interest rate then real interest rate increase which will result appreciation of doller . When real interest rate increase , hot money inflow to the U.S to take the advantage of higher interest rate , it increase the demand for doller which result the appreciation of U.S doller .