Suppose That the Domestic Interest Rate Is 5% and That

Multiple Choice

Suppose that the domestic interest rate is 5% and that the foreign interest rate is 8%. Also assume that the domestic currency is expected to depreciate by 4% during the coming year. Given this information, we know that:

A) individuals will only hold domestic bonds.
B) individuals will only hold foreign bonds.
C) individuals will be indifferent about holding domestic or foreign bonds.
D) the interest parity condition holds.
E) the purchasing power parity holds.