The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the

Question

Quizplus · Accepted Answer

The interplay between interest rate differentials and exchange rates is the basis of interest rate parity theory. This theory explains how exchange rates adjust to compensate for differences in interest rates between two countries, such that investors will earn approximately equal returns in both countries. This process helps to maintain equilibrium in both the foreign exchange market and the money market. Purchasing power parity theory refers to the relationship between inflation rates and exchange rates, while balance of payments quantum theory and arbitrage markets theory are not relevant to this concept.

The Interplay Between Interest Rate Differentials and Exchange Rates Such