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What is relationship between exchange and interest rates

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This morning the exchange rate between the United States of Albion dollar and the Republic of Oz dollar was 1.50:1 and interest rates in both countries were 6%.

(a) If the market thinks that later today the Republic of Oz will raise interest rates to 8%, what will happen to the exchange rate?

(b) If instead interest rates in Oz are increased to only 7%, what will happen to the ex- change rate?

(c) What is the relationship between exchange rates and interest rates in your exam- ple? Does this contradict UIP?

Reference no: EM13888010

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