The principle involved in short-run uncovered interest parity is that home interest rates will be equal to:
A) the world equilibrium real rate of interest.
B) the foreign interest rate minus foreign inflation.
C) the foreign rate of interest plus the expected rate of depreciation of the home currency.
D) the domestic nominal rate of interest plus domestic inflation.

Question

Quizplus · Accepted Answer

Short-run uncovered interest parity states that the difference between the foreign interest rate and the expected rate of depreciation of the home currency should equal the home interest rate. Therefore, option C is the correct answer. Option A is incorrect because it refers to the world real rate of interest, which is not a factor in short-run uncovered interest parity. Option B is incorrect because it refers to foreign inflation, which is not a factor in short-run uncovered interest parity. Option D is incorrect because it refers to domestic inflation, which is also not a factor in short-run uncovered interest parity.

The Principle Involved in Short-Run Uncovered Interest Parity Is That