Which of the following parity conditions is (are)correct?

Question

Quizplus · Accepted Answer

All three statements are correct. The interest-rate parity theory asserts that the forward premium/discount must be equal and opposite in size to the national interest rate differential, keeping exchange rates in equilibrium in the short run. The purchasing-power parity theory, on the other hand, implies that exchange rates must change to reflect variations in international inflation rates over the long term. Finally, the international Fisher effect links interest rate differentials to inflation differentials, implying that nominal interest rate differentials should be equal to real interest rate differentials plus expected inflation differentials.

Which of the Following Parity Conditions Is (Are)correct