If Exchange Rates Adjust to Reflect Inflation Differentials Across Countries,then

question 6

Multiple Choice

If exchange rates adjust to reflect inflation differentials across countries,then:

• A) the law of one price will always hold.
• B) no one will use forward currency markets.
• C) interest rates will be equal across countries.
• D) PPP is said to hold.

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Definitions:

Lending

The act of providing funds to another party with the expectation that the funds will be repaid, often with interest, over a specified period of time.

Excess Reserves

Funds that banks hold over and above the legal requirements, which can influence their ability to lend.

Deposits

Funds placed into an account at a financial institution for safekeeping and to earn interest.

Excess Reserves

Excess reserves are the funds that banks hold over and above the required minimum reserves mandated by central banking regulations, often stored in central banks.