Which of the Following Regarding Potential Problems with an IRP

question 50

Multiple Choice

Which of the following regarding potential problems with an IRP is NOT true?

• A) Evidence on IRP theories is mixed.
• B) Herd behavior can cause large purchases or sales of a particular currency that drive values beyond their normal bounds,resulting in problems such as currency crises.
• C) When interest rates change in the U.S.,foreign interest rates should also change under the IRP.However,this may not happen.
• D) International investors may globally diversify their investments and behave passively toward arbitrage activities.
• E) There are no problems with IRP.

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Definitions:

Elasticity

The ability of a material or body to resume its normal shape after being stretched or compressed.

Parabronchi

Minute tubular air passages within the lungs of birds through which respiratory gas exchange occurs, part of their highly efficient respiratory system.

Birds

Warm-blooded vertebrates characterized by feathers, beaks without teeth, and laying hard-shelled eggs.

Countercurrent Exchange

A mechanism in which fluids flow in opposite directions, exchanging properties (such as heat or chemical constituents) to maximize transfer rates.