Interest Rate Parity

question 16

Multiple Choice

Interest rate parity:

• A)eliminates covered interest arbitrage opportunities.
• B)exists when spot rates are equal for multiple countries.
• C)means that the nominal risk-free rate of return must be the same across countries.
• D)exists when the spot rate is equal to the futures rate.
• E)eliminates exchange rate fluctuations.

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Definitions:

Private Good

A product or service that is excludable and rival in consumption, meaning only those who pay for it can consume it, and one person’s consumption prevents another's.

Common Resource

A type of good that is non-excludable but rivalrous, meaning it's available to everyone but its consumption by one individual diminishes its availability for others.

Tragedy of the Commons

A situation where individual users, acting independently according to their own self-interest, deplete or spoil shared resources, even though it is not in anyone's long-term interest.

Social Incentives

Motivations that influence an individual's behavior based on social factors, including approval, respect, or the desire to be part of a community.