If Interest Rate Parity Holds, Then the One-Year Forward Rate

question 31

Multiple Choice

If interest rate parity holds, then the one-year forward rate of a currency will be ____ the predicted spot rate of the currency in one year according to the international Fisher effect.

• A) greater than
• B) less than
• C) equal to
• D) answer is dependent on whether the forward rate has a discount or premium

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Definitions:

Reaction Formation

A psychological defense mechanism where an individual unconsciously replaces unacceptable thoughts or feelings with their opposites.

Aggressive Impulses

Instinctual drives that lead individuals to act or react in a forceful or hostile manner.

Neo-Freudian

Psychologists who accepted the basic concepts of Freud's theory but modified and expanded upon them to include social and cultural aspects.

Freud's Theories

A set of psychological and psychoanalytical theories developed by Sigmund Freud that explore the functioning of the human mind, particularly the unconscious and its influence on behavior.