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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