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

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Quizplus · Accepted Answer

The interplay between interest rate differentials and exchange rates is the basis of the interest rate parity theory. This theory states that if the interest rate differential between two countries is different, then the exchange rate between those two countries will adjust in such a way that investors in both countries receive equal returns on their investments. This adjustment process continues until the foreign exchange market and the money market reach equilibrium. Therefore, option C is the correct answer. Option A is incorrect because purchasing power parity theory refers to the idea that the exchange rate between two currencies should be equal to the ratio of their price levels. Option B is incorrect because balance of payments is a record of all transactions between one country and the rest of the world over a specific period.

The Interplay Between Interest Rate Differentials and Exchange Rates Such