Which of the Following Regarding Potential Problems with an IRP

question 50

Multiple Choice

Which of the following regarding potential problems with an IRP is NOT true?

• A) Evidence on IRP theories is mixed.
• B) Herd behavior can cause large purchases or sales of a particular currency that drive values beyond their normal bounds,resulting in problems such as currency crises.
• C) When interest rates change in the U.S.,foreign interest rates should also change under the IRP.However,this may not happen.
• D) International investors may globally diversify their investments and behave passively toward arbitrage activities.
• E) There are no problems with IRP.

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Definitions:

Drawer

The person who writes or signs a bill of exchange, such as a check, thus creating a financial obligation.

Sight Draft

A financial instrument that is payable on presentation or sight to the drawer.

Payable

Refers to debts or obligations of an individual or company that are due to be paid to creditors.

Acknowledged

Recognized or accepted as valid or true by a person or entity.