The Larger the Degree by Which the Foreign Interest Rate

question 21

True/False

The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula.

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Definitions:

Inferior Good

A type of good for which demand decreases as the income of consumers increase, unlike normal goods for which demand increases with an increase in income.

Income Decrease

Income decrease refers to a reduction in the amount of money earned by an individual or received by a household, affecting their ability to spend and save.

Giffen Goods

A type of product that paradoxically experiences increased demand as its price rises, seemingly contrary to the basic law of demand due to the effect on consumption of essential goods.

Inferior Goods

Products whose demand decreases as the income of consumers increases, due to the preference for higher-quality substitutes.