The interest parity condition can be written as
A) R = R - (Eᵉ -E)/E.
B) R = R + (Eᵉ -E)/E.
C) R = R² - (Eᵉ -E)/E.
D) R = R/(Eᵉ -E).
E) R = R + (Eᵉ +E)/E.

Question

Quizplus · Accepted Answer

The interest parity condition states that the difference in interest rates between two countries is equal to the difference in their exchange rates. This can be written as R = R* + (Eᵉ - E)/E, where R is the domestic interest rate, R* is the foreign interest rate, Eᵉ is the expected exchange rate, and E is the current exchange rate. Rearranging the equation gives R = R* + (Eᵉ - E)/E, which is equivalent to choice B.

The Interest Parity Condition Can Be Written as