Question

Suppose the interest rate in Canada rises and the interest rate in Japan remains the same. The interest rate parity condition implies that given equal risk in two countries the Yen is expected to appreciate against dollar.

A) True

B) False

Answer 1

If the interest rate in Canada rises, then what happens is that according to interest rate parity conditions if the interest rate in one country increases more than that of another, then under all conditions constant the country in which there is a net interest rate increased appreciates against the another country and in this regard Canadian dollar is depreciated against the Japanese yen or the Japanese Yen is appreciated against the Canadian dollar

Therefore (A) True is the answer to this question