When Arbitrage Occurs Across Countries with a Flexible Exchange Rate

question 75

Multiple Choice

When arbitrage occurs across countries with a flexible exchange rate and when the bonds in each country are identical and there are no barriers to capital flows then the:

• A) interest rates on the bonds will be identical.
• B) expected return on the bonds will be identical.
• C) inflation rates in each country will be identical.
• D) prices of the bonds will be identical.

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Definitions:

Progressive Income Tax

A tax system in which the tax rate increases as the taxable amount increases, leading to higher earners paying a higher rate of tax on their income.

Equity

The concept of fairness or justice in the allocation of resources or treatment of individuals, or a term referring to ownership interest in a company through stocks.

Efficiency

The state of optimizing resources to achieve the highest possible output with the least waste of inputs.

Tax Efficiency

A measure of how much of an investment's return is left after taxes, indicating the effectiveness of minimizing tax liability through investment choices.