D. r$ = 20%

Economics:
10th Edition
ISBN:9781285859460
Author:BOYES, William
Publisher:BOYES, William
Chapter36: Exchange Rates And Financial Links Between Countries
Section: Chapter Questions
Problem 14E
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Assume that relative to today, Dollar is expected to depreciate against the Euro by 10% in real terms over the next period. Assume further that the expected rates of inflation (over the next period) is 10% and 5% in Australia and Europe, respectively. If the real interest rate in Europe r€ = 5%, choose the correct option:

 

A.

r$ = -5%

 

B.

r$ = 10%

 

C.

The above information is not enough to calculate r$

 

D.

r$ = 20%

 

E.

r$ = 15%

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