Which of the following statements describes the interest parity condition? A) In the equilibrium, all the...

Which of the following statements describes the interest parity condition? A) In the equilibrium, all the prices must be the same in the international market. B) In the equilibrium, the inflation rates must be the same in the international market. C) In the long run, the exchange rates must be the same in the international market. D) In the equilibrium, the rates of return on assets of comparable risk and liquidity must be the same in the international market.

Solutions

Expert Solution

Correct choice is option d

Under the assumption of flexible exchange rates and perfect capital mobility investors will be indifferent to interest rates that are available on the deposits denominated in different currencies across different countries when adjusted for exchange rate risk and liquidity. This implies that at the equilibrium, interest rate on domestic assets as well as foreign assets will be considered equal after adjustment for riskiness.

Rahul Sunny answered 1 year ago

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