Explain why the interest parity condition must hold if the foreign exchange market is in equilibrium
What will be an ideal response?
The foreign exchange market is in equilibrium when deposits of all currencies offer the same expected rate of return. Potential holders of foreign currency deposits view them all as equally desirable assets. If expected rate of return on any currency deposit is higher or lower than the other, there will exist an excess supply or demand for that currency because one will yield a higher return than the other.
You might also like to view...
Profits are part of the
A) factor services. B) monetary value of output. C) final consumer goods. D) total income.
A tariff placed on a foreign good will
A) reduce the price of a competing domestic good. B) increase the price of a competing domestic good. C) increase the quantity sold of both the foreign and competing domestic good. D) reduce the quantity sold of both the foreign and competing domestic good.
A graph showing all the combinations of capital and labor available for a given total cost is the
A. isocost line. B. budget constraint. C. expenditure set. D. isoquant.
The Consumer Price Index is a fixed-weight index.
Answer the following statement true (T) or false (F)