True or False?
The correct answer is False. No mention is made of the risk of holding New Zealand as opposed to U.K. assets. It could be that there is a 3 percent risk premium on British assets. If there is no risk differential---that is, covered interest parity holds---then the interest rate in New Zealand will be 4 percent as the question states.
Recall that the domestic/foreign interest rate differential can be expressed as
id - if = Ψ + ρd
where ρd is the difference in the risk on the two countries' assets. Letting New Zealand be the domestic economy, we can rearrange the above equation to yield
inz - iuk = Ψ + ρd
If ρd is zero, then inz = (- 3) + 7 = 4. Otherwise, inz = 4 + ρd , where ρd can be positive or negative.