According to interest rate parity theory,differences in observed nominal interest rates in two countries should equal differences in the expected rates of inflation in the two countries.

Question

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Interest rate parity theory states that the difference between two countries' nominal interest rates should be equal to the difference between their expected rates of inflation, assuming that other factors such as currency risk are equal. This is because investors should be indifferent between investing in either country's currency, as the interest rate differential is offset by the expected exchange rate movement caused by inflation differences.

According to Interest Rate Parity Theory,differences in Observed Nominal Interest