Would us$ depreciate or appreciate

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Suppose that we commence with short term interest rates in Canada and the US being equal, and suppose that both countries are enjoying a rate of inflation of 0%. Then suppose that, in period p, short term interest rates rise in Canada, while remaining unchanged in the US. There is no change in the inflation rates in the two countries. The expected Can$-US$ spot rate in period P+1 remains unchanged. Would the US$, according to the Interest Parity theory, depreciate or appreciate aginst the Can$ in the period p? Would US$ depreciate or appreciate, between p and p+1? why?

Reference no: EM13670293

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