Using the UIP equation, equilibrium in the short run occurs when:
A) arbitrage is possible.
B) the spot rate is such that foreign and domestic investment returns are equalized.
C) the spot rate is less than the forward rate.
D) foreign interest rates are higher than domestic rates of interest.

Question

Quizplus · Accepted Answer

The Uncovered Interest Parity (UIP) equation states that the expected change in the exchange rate between two currencies over a given period is equal to the difference in interest rates between the two currencies. In the short run, equilibrium occurs when the spot rate is adjusted to equalize the foreign and domestic investment returns, which means that the answer is B.

Using the UIP Equation, Equilibrium in the Short Run Occurs