Equilibrium occurs in the foreign exchange market when the

Question

Quizplus · Accepted Answer

Equilibrium occurs in the foreign exchange market when the domestic return equals the expected foreign return when measured in the same currency. In other words, investors are indifferent between investing in domestic assets or foreign assets, as the returns are equalized. This is what drives the exchange rate to its equilibrium level. Choices B, C, and D are not correct as they do not directly relate to equilibrium in the foreign exchange market.

Equilibrium Occurs in the Foreign Exchange Market When the