With interest rate parity, money flows to where interest rates are lowest.

Question

Quizplus · Accepted Answer

With interest rate parity, money flows to where interest rates are equalized, not necessarily lowest. Because if a currency has higher interest rates than another currency, and the exchange rate between the two currencies is expected to remain constant, then investors will move their money to the currency with the higher interest rate. This movement of capital will result in an increase in demand for the higher-yielding currency, which will cause its value to appreciate relative to the lower-yielding currency until the interest rates are equalized.

With Interest Rate Parity, Money Flows to Where Interest Rates