If the markets in two countries are in equilibrium, the parity conditions ensure which of the following?
A) The forecasted inflation rate differential between the two countries is exactly equal to the interest rate differential between those same countries.
B) The currency of the country with the higher inflation rate will sell at a discount to the other currency.
C) The forward discount will exactly cancel out the forecasted inflation differential.
D) If the information about future inflation is unbiased and the markets are in equilibrium, then the forward rate will be an unbiased predictor of the expected future spot rate.
E) All of the above conditions are ensured by the parity conditions.

Question

Quizplus · Accepted Answer

Parity conditions, such as interest rate parity, purchasing power parity, and the international Fisher effect, collectively ensure that the forecasted inflation rate differential matches the interest rate differential (A), the currency of the higher inflation country will depreciate (B), the forward discount or premium adjusts for inflation differentials (C), and under efficient markets, the forward rate predicts the future spot rate if information is unbiased (D).

If the Markets in Two Countries Are in Equilibrium, the Parity