Which of the following quotations best describes interest rate parity in action?
A)"The expected appreciation of the Canadian dollar is currently lowering demand for it."
B)"The market feeling is that the Canadian dollar is overvalued and will likely appreciate."
C)"The price of bananas is the same in Canada and the United States, adjusting for the exchange rate."
D)"The demand for the Canadian dollar has increased due to the recent increase in the Canadian interest rate."
E)none of the above

Question

Quizplus · Accepted Answer

Interest rate parity theory states that the difference in interest rates between two currencies should be reflected in the exchange rate. Thus, if the interest rate in one country increases relative to another, demand for the currency of that country should increase as well, leading to an increase in its exchange rate. Option D best describes this scenario.

Which of the Following Quotations Best Describes Interest Rate Parity