When arbitrage occurs across countries with flexible exchange rates and when the bonds in each country are identical and there are no barriers to capital flows:
A) the interest rates on the bonds will be identical.
B) the prices of the bonds will be identical.
C) the inflation rates in each country will be identical.
D) none of the answers provided is correct.

Question

Quizplus · Accepted Answer

Arbitrage across countries with flexible exchange rates and identical bonds without barriers to capital flows does not necessarily lead to identical interest rates, bond prices, or inflation rates due to factors like exchange rate expectations and differing monetary policies.

When Arbitrage Occurs Across Countries with Flexible Exchange Rates and When