The interplay between interest rate differentials and exchange rates such that each adjusts until the foreign exchange market and the money market reach equilibrium is called the:

Question

Quizplus · Accepted Answer

The interplay between interest rate differentials and exchange rates is referred to as the Interest Rate Parity Theory. This theory suggests that the interest rate differential between two currencies changes to offset any gains or losses from exchange rate movements. In other words, if there is a higher interest rate in one country compared to another, investors will move their funds to the higher interest rate country, causing the exchange rate to adjust until the return on investment is equal in both countries.

The Interplay Between Interest Rate Differentials and Exchange Rates Such