1.The interest parity condition a) Equates the domestic interest rate to the for

Question

1.The interest parity condition

a) Equates the domestic interest rate to the foreign interest rate.

b) Equates the domestic interest rate to the foreign to domestic currency exchange rate.

c) Equates both countries’ future exchange rate.

d) Is a no-arbitrage condition.

2. According to our model, the US and Eurozone

a) Are connected through their money markets

b) Are connected through exchange rate markets

c) Are connected because in equilibrium they have the same interest rate

d) Are not connected through exchange rate market.

Explanation / Answer

ans 1: option d - no arbitrage condition

reason:

Interest rate parity is a no-arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries

ans 2: option c- are connected because in equilibrium they have the same interest rate

reason:

this is what we just said above that in equilibrium the interest rate must be same in the two countries so eliminate arbitrage i.e. interest parity condition.

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