Which of the following statements is most correct?
A) Most interbank foreign exchange quotations are given in American terms.
B) Transactions in the capital account (section B) of the balance of payments are usually not reversible.
C) If the real, risk-free interest rate is the same in two countries, then nominal interest rates in the two countries and the exchange rate for the two currencies are driven by the rate of inflation in the two countries.
D) Covered interest arbitrage is a technique for earning a riskless profit without having to commit one's own money when purchasing power parity does not hold.
E) All of the statements above are correct.

Question

Quizplus · Accepted Answer

Statement C is correct because it reflects the International Fisher Effect, which posits that differences in nominal interest rates between countries are determined by expected inflation rates, assuming that real interest rates are equal across countries. This principle helps explain movements in exchange rates based on inflation differentials.

Which of the Following Statements Is Most Correct