Author Question: What is interest rate parity and what happens when this condition doesn't hold? What will be an ... (Read 123 times)

mia · **on:** Jun 29, 2018

What is interest rate parity and what happens when this condition doesn't hold?

What will be an ideal response?

Question 2

Skeeter's Skeeball Castle has seen its business slow down ever since Kerrie's Off-Key Karaoke opened up next door. Since the opening of Kerrie's Off-Key Karaoke, the opportunity cost of playing skeeball at Skeeter's has

A) decreased. B) not changed. C) fallen to zero. D) increased.

chreslie · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

Interest rate parity occurs when, for risk-free transactions, the rate of return earned by a unit of currency is the same in different nations. If the rate of return for the U.S. dollar is higher than that for, say, the Japanese yen, interest rate parity does not hold. In this case people will expect the value of the dollar to fall against the yen (that is, the U.S. dollar is expected to depreciate over time) so that interest rate parity is restored because the rate of return earned by a unit of currency is the same in both nations.
3 What makes an exchange rate hard to predict?

Answer to Question 2

D