The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the

Question

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The interplay between interest rate differentials and exchange rates is referred to as the Interest Rate Parity Theory. This theory suggests that the exchange rate between two currencies will adjust until the returns in each country are equal when expressed in the same currency. This adjustment is necessary for the foreign exchange market and the money market to reach equilibrium. Option A (Purchasing Power Parity Theory) and Option B (Balance of Payments) are related to exchange rates, but not to the interplay between interest rate differentials and exchange rates. Therefore, the correct answer is C (Interest Rate Parity Theory).

The Interplay Between Interest Rate Differentials and Exchange Rates Such