According to the interest rate parity theory, interest rates and exchange rates adjust until the foreign exchange market and the money market are in equilibrium.

Question

Quizplus · Accepted Answer

The interest rate parity theory suggests that interest rates between two countries should, in the long run, be equal or converge to the same level, and any differences should be offset by changes to the exchange rate. In other words, the theory seeks to establish equilibrium between interest rates and exchange rates. Therefore, option A is the correct answer.

According to the Interest Rate Parity Theory, Interest Rates and Exchange