Suppose the expected real interest rate in Hong Kong is 5 percent per year while that in Singapore it is 2 percent per year

Answer :-

The nominal exchange rate will decrease ($HK will apreciate). But the real exchange rate will decrease following the appreciation of HK$.

A higher interest rate in the Hong Kong will make the investors of Singapore to invest in the Hong Kong and that will lead to a flight of the capital in the Singapore and increase in the demand for the HK$. That will lead to an appreciation of the value of HK$ in the market and SNG will depreciate against the HK$.

This will continue to the point where the SNG has depreciated so much that the difference in the exchange rate can be covered by the value of the currency or the Singapore's banks will increase the interest rate to the point where they are equal to the Hong-Kong rates.