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

-Interest rate parity can be summarized by which of the following equilibrium conditions?
A)The foreign interest rate must equal the domestic interest rate plus the expected inflation.
B)The foreign interest rate must equal the domestic interest rate.
C)The foreign interest rate must equal the expected change in the exchange rate.
D)The domestic interest rate must equal the foreign interest rate plus the expected change in exchange rate.
E)The domestic interest rate must equal the foreign interest rate minus any expected inflation.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Interest rate parity can be summarized by which of the following equilibrium conditions?
A)The foreign interest rate must equal the domestic interest rate plus the expected inflation. 
B)The foreign interest rate must equal the domestic interest rate. 
C)The foreign interest rate must equal the expected change in the exchange rate. 
D)The domestic interest rate must equal the foreign interest rate plus the expected change in exchange rate. 
E)The domestic interest rate must equal the foreign interest rate minus any expected inflation.

Quizplus · Accepted Answer

Interest rate parity states that the difference between the domestic and foreign interest rates is equal to the expected change in the exchange rate.

The Figure Given Below Depicts the Foreign Exchange Market for British