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CFA Level 2
Economics

Currency Appreciation due to Interest Rate Differential

Medium Currency Exchange Rates Exchange Rate Models

In the context of exchange rate models, consider the situation where interest rates in Country A are significantly higher than those in Country B. As a result, investors have been flocking to Country A to take advantage of these higher yields, causing an influx of capital into Country A's currency. This situation is essential to understanding the dynamics of currency appreciation and depreciation.

According to which of the following exchange rate models would you expect the exchange rate of Country A's currency relative to Country B's currency to appreciate in the short term due to the interest rate differential?

Hint

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