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
A) purchasing power parity theory.
B) balance of payments.
C) interest rate parity theory.
D) multinational corporation.

Question

Quizplus · Accepted Answer

The interplay between interest rate differentials and exchange rates is known as interest rate parity theory. This theory suggests that if the interest rates in two countries differ, then the exchange rate between their currencies will adjust to reflect the difference. Therefore, each market will reach equilibrium as a result of this adjustment in exchange rates. The other options, such as purchasing power parity theory, balance of payments, and multinational corporation, do not directly relate to the interplay between interest rates and exchange rates.

The Interplay Between Interest Rate Differentials and Exchange Rates Such