When Arbitrage Occurs Across Countries with Flexible Exchange Rates and When

question 59

Multiple Choice

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

• A)The interest rates on the bonds will be identical
• B)The prices of the bonds will be identical
• C)The inflation rates in each country will be identical
• D)None of the answers provided is correct

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Definitions:

National Defense

The governmental and military activities aimed at defending a country's territorial integrity and protecting its citizens from external threats.

Misallocated

A situation where resources are used inefficiently, resulting in lost potential output or wasteful expenditures.

Market Failure

A situation in which the allocation of goods and services by a free market is not efficient, often leading to a social welfare loss.

Public Good

An offering of goods or services to society's members at no cost, made available by public institutions or private bodies or individuals, not aiming to generate profits.