If the yields on one-year government bonds in Australia and U.S. are 4% and 3%, respectively, what would you expect the AU$/US$ exchange rate to change in one year according to Interest Rate Parity Theory?

Select one:

a.

AU$ is expected to depreciate by about 1% relative to US$

b.

AU$ is expected to depreciate by about 3% relative to US$

c.

AU$ is expected to appreciate by about 1% relative to US$

d.

US$ is expected to depreciate by about 4% relative to AU$

e.

AU$ is expected to appreciate by about 4% relative to US$