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

Question

Quizplus · Accepted Answer

With rate of return parity, money flows to where rates of return are highest, not lowest. Investors seek out the highest yield for their investment, regardless of the country's risk level or currency exchange rates. Thus, if a country's interest rates are higher relative to other countries, its currency will appreciate as investors purchase it to invest in that country. Similarly, if a country's interest rates are relatively low, its currency will depreciate as investors sell it to invest elsewhere.

With Rate of Return Parity, Money Flows to Where Rates