Which of the following statements is most correct?
A) The term "parity conditions" refers to five economic theories that interact with each other to mutually define consistent values for interest rates in two countries and the exchange rates for their currencies.
B) If the real, risk-free interest rate is the same in the two countries, then nominal interest rates in the two countries and the exchange rate for the two currencies are driven by the rates of inflation in the two countries.
C) Because it is possible to measure expected inflation rates in the two countries quite accurately using an index such as the Consumer Price Index (CPI), the parity conditions usually hold quite closely and any deviations are usually small and short-lived.
D) All of the statements above are correct
E) Only statements a and b are correct.

Question

Quizplus · Accepted Answer

Statements A and B are correct as they accurately describe the relationship between interest rates, exchange rates, and inflation in the context of international finance and the concept of parity conditions. Statement C is not entirely accurate because, while CPI is a tool for measuring inflation, predicting future inflation rates with high accuracy is challenging, and deviations in parity conditions can be significant and persistent.

Which of the Following Statements Is Most Correct