Suppose the expected inflation rate of U.S. has just been revised upward. In thi

Question

Suppose the expected inflation rate of U.S. has just been revised upward. In this case, U.S. interest rate will increase relative to Canadian interest rate. How would the forward exchange rate change?

U.S. dollar will appreciate relative to Canadian dollar.

U.S. dollar will depreciate relative to Canadian dollar.

U.S. dollar will first appreciate then depreciate relative to Canadian dollar.

There won’t be any change in the exchange rate between U.S. dollar and Canadian dollar.

None of the above options.

Explanation / Answer

Suppose the expected inflation rate of U.S. has just been revised upward. In thi

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