Daniel Parthik has collected data for three countries provided below:
Country
Real Interest rate
Risk premium
A
3%
0.5%
B
3.5%
1.5%
C
2.5%
1%
Assuming that the exchange rates are current at equilibrium, which country would see their real exchange rate appreciate? A. Country B B. Country C C. Country A
The difference in real interest rate and risk premium drive short-term real appreciation/depreciation of a currency. For country A, the difference is 2.5% while it is 2% and 1.5% for countries B and C respectively.
