An Increase in the Foreign One- Year Interest Rate Expected

Multiple Choice

An increase in the foreign one- year interest rate expected to occur in, say, two years will, all else fixed, have which of the following effects in a flexible exchange rate regime?

A) The real exchange rate will decrease with no change in the nominal exchange rate.
B) Both the real and the nominal exchange rate will decrease.
C) The nominal exchange rate will decrease and the real exchange rate will increase.
D) The nominal exchange rate will decrease with no change in the real exchange rate.
E) No change in either the nominal or real exchange rate.