Which of the following parity conditions is (are)correct? a. The interest-rate p

Question

Which of the following parity conditions is (are)correct?
a. The interest-rate parity theory states that the forwardpremium/discount should be equal and opposite in size to thenational interest rate differential. b. The purchasing-power parity theory states that in thelong run exchange rate changes tend to reflect internationaldifferences in inflation rates. c. The international Fisher effect states that nationalinterest rate differentials are the result of inflationdifferentials. d. All of the above are correct. Which of the following parity conditions is (are)correct?
a. The interest-rate parity theory states that the forwardpremium/discount should be equal and opposite in size to thenational interest rate differential. b. The purchasing-power parity theory states that in thelong run exchange rate changes tend to reflect internationaldifferences in inflation rates. c. The international Fisher effect states that nationalinterest rate differentials are the result of inflationdifferentials. d. All of the above are correct.

Explanation / Answer

The Interest-rate Parity theory states that the InterestRate differential does not equal the forward premium /discount. Purchasing Power Parity theory states that the exchange ratebetween two countries must change to reflect differences ininflation rates between these two countries. Thus, Answer is Option (c) The International Fishereffect states that national interest rate differentials are theresult of inflation differentials.

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