If there is a time when interest rate parity does not exist:
A) capital will flow to the country offering the highest expected return.
B) there will be no international capital flows.
C) trade in goods and services will not be possible.
D) no changes in exchange rates are expected.

Question

Quizplus · Accepted Answer

When interest rate parity does not exist, investors will seek the highest expected return, leading to capital flows towards countries offering higher interest rates. This is because the discrepancy in interest rates suggests an opportunity for arbitrage, where investors can borrow in countries with low interest rates and invest in countries with high interest rates to gain profit.

If There Is a Time When Interest Rate Parity Does