If i_d is the domestic interest rate, i_f is the foreign interest rate, xa is the expected rate of appreciation of the foreign currency (or the expected rate of depreciation of the home currency), and financial capital is mobile across countries (and assuming no risk premium), then equilibrium in international financial asset markets is indicated by the expression A) xa = (i_d/i_f). B) xa = i_d + i_f. C) i_f = i_d + xa. D) i_d = i_f + xa

Question

Quizplus · Accepted Answer

The correct expression for equilibrium in international financial asset markets, given the assumptions, is that the domestic interest rate (i_d) equals the foreign interest rate (i_f) plus the expected rate of appreciation of the foreign currency (xa). This reflects the interest rate parity condition, where any difference in interest rates between two countries is offset by the expected change in exchange rates, ensuring no arbitrage opportunities exist.

If Id Is the Domestic Interest Rate, If Is the Foreign

If I_d Is the Domestic Interest Rate, I_f Is the Foreign