Interest rate parity means:
A) goods and services trade at equal prices in domestic currencies.
B) nominal interest rates in all countries are the same.
C) real interest rates in all countries are the same.
D) differences in interest rates among countries reflect expected changes in exchange rates.

Question

Quizplus · Accepted Answer

Interest rate parity is a theory that suggests differences in interest rates among countries reflect expected changes in exchange rates. This means if one country's interest rate is higher than another's, the currency of the country with the higher interest rate is expected to depreciate against the other country's currency to balance the difference.

Interest Rate Parity Means