We Can Use the Existence of Arbitrage and the Idea

question 7

Multiple Choice

We can use the existence of arbitrage and the idea of uncovered interest parity (UIP) to assume that any interest rate differential between two currencies must be offset by:

• A) the change in the quantity of money.
• B) an offsetting differential in the expected exchange rates.
• C) offsetting changes in real income.
• D) resulting increases in borrowing denominated in the low-interest currency.

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Definitions:

Demand Shifts

Movements of the demand curve to the left or right in a market diagram, indicating a change in the amount consumers are willing and able to purchase at various prices.

Equilibrium Price

The cost at which the amount of a product or service that consumers want to buy matches the amount available for sale, leading to a state of equilibrium in the market.

Supply Shifts

Supply shifts refer to changes in the supply curve caused by factors other than price, such as technology, production costs, and supplier expectations, leading to different quantities being supplied at the same price.

Surplus

The situation in which the quantity of a good or service supplied exceeds the quantity demanded, often leading to lower prices.