4) If the interest rate is 7 percent on euro deposits and 5 percent on dollar deposits, and if the dollar is expected to appreciate at a 4 percent rate, A) euro deposits have a higher expected return than dollar deposits. B) the expected return on euro deposits in terms of dollars is 11 percent. C) the expected return on dollar deposits in terms of euros is 1 percent. D) the expected return on euro deposits in terms of dollars is 3 percent. E) the expected return on dollar deposits equals the expected return on euro deposits. When the exchange rate changes from 1.0 euros to the dollar to 1.2 euros to the dollar, the euro has _ and the dollar has A) appreciated; appreciated B) depreciated; appreciated C) appreciated; depreciated D) depreciated; depreciated

The expected return on euro deposits in terms of dollars can be calculated by adding the euro interest rate (7 percent) to the expected appreciation of the dollar (4 percent), leading to an 11 percent return. Therefore, option B is correct. As for the exchange rate shift, moving from 1.0 to 1.2 euros per dollar indicates that fewer dollars are required to purchase a euro, meaning the euro has appreciated, while the dollar has depreciated. Thus, option C is the right choice. In terms of historical context, interest rates and currency valuations have often influenced each other significantly. For example, during the 1980s, the U.S. saw explosive growth in its economy, which led to significant interest rate hikes and currency valuation shifts, impacting global markets. For those looking to dive deeper, you might explore books on international finance or currency markets, such as "Currency Trading for Dummies" by Kathleen Brooks or "The Intelligent Investor" by Benjamin Graham. These resources elucidate interest rates, foreign exchange dynamics, and their impact on investment strategies in an engaging manner.