28. Assume that the interest rate parity holds between the U.S. and England. Then the rate of return on the British (foreign) investment is negatively related to the expected dollar/pound exchange rate.
    1. False
    2. True

29. Currency transactions by which of the following groups is included in the current account?
30. 1. Mutual funds
    2. Banks
    3. Tourists
    4. Insurance companies

30. Suppose the Mexican government reduces the domestic interest rate to encourage domestic consumption. All other things being equal, this disturbs the interest rate parity between the return on the U.S. and Mexican assets and causes the dollar to appreciate against the peso.

1. 1. False
   2. True

31. The rate of return on a foreign investment depends not only on the foreign interest rate but also on the spot exchange rate and the expected exchange rates one year in the future.

1. 1. foreign interest rate; expected exchange rates
   2. domestic interest rate; foreign interest rate
   3. expected exchange rate; domestic inflation rate
   4. expected exchange rate; foreign inflation rate