At a given nominal rate of interest, when spending is equal to output and there is uncovered interest parity, we have:
A) real exchange rate parity.
B) equilibrium in the goods market and in the forex market.
C) stable inflation and low unemployment.
D) depreciation of the home currency.

Question

Quizplus · Accepted Answer

When spending is equal to output, we have equilibrium in the goods market. If this equilibrium is combined with uncovered interest parity, which means that the expected return on domestic assets equals the expected return on foreign assets, we have equilibrium in the forex market as well. This combination leads to no arbitrage opportunities and ensures that the nominal exchange rate adjusts to equilibrate the supply and demand of currencies. Therefore, we have equilibrium in both the goods and forex markets. Real exchange rate parity is a different concept that relates to the prices of goods across different countries, and it may or may not hold depending on various factors. Stable inflation and low unemployment are desirable outcomes but not necessarily implied by this condition. Depreciation of the home currency is not implied either, as the nominal exchange rate can remain unchanged if other factors change.

At a Given Nominal Rate of Interest, When Spending Is