When the law of one price is applied to interest rates, it suggests that:

Question

Quizplus · Accepted Answer

The law of one price suggests that different prices for the same product in different locations should not exist in a competitive market. Similarly, when applied to interest rates, it suggests that varying interest rates take into account anticipated differences in inflation rates. In other words, if two countries have the same expected inflation rate, their interest rates should be roughly equal. However, if they have differing expected inflation rates, their interest rates should reflect those differences. Therefore, option D is the correct answer.

When the Law of One Price Is Applied to Interest