The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-If a dollar invested in the United States yields the same return as a dollar's worth of yen invested in Japan, then it implies that:
A)purchasing power parity exists.
B)the foreign exchange market is in equilibrium.
C)the dollar/yen exchange rate is fixed.
D)interest rate parity exists.
E)both the currencies are pegged to a fixed amount of gold.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-If a dollar invested in the United States yields the same return as a dollar's worth of yen invested in Japan, then it implies that:
A)purchasing power parity exists. 
B)the foreign exchange market is in equilibrium. 
C)the dollar/yen exchange rate is fixed. 
D)interest rate parity exists. 
E)both the currencies are pegged to a fixed amount of gold.

Quizplus · Accepted Answer

If a dollar invested in the United States yields the same return as a dollar's worth of yen invested in Japan, it implies that interest rate parity exists. Interest rate parity is a condition that should be satisfied in an efficient foreign exchange market. It means that the return on an investment in one currency should be equal to the return on an investment in another currency, adjusted for the expected change in exchange rates over the investment horizon.

The Figure Given Below Depicts the Foreign Exchange Market for British