Exam 8: The Power of Arbitrage: Purchasing Power and Interest Rate Parities

If the difference between the domestic inflation rate and the foreign inflation rate exceeds the percentage depreciation in the domestic currency, then relative purchasing power parity holds true.

Real interest parity arises from combining: (I) Relative purchasing power parity. (II) Uncovered interest parity. (III) Covered interest parity.

The rational expectations hypothesis suggests that people form expectations based on all available past and current information and on a basic understanding of how markets function.

The factor that can account for failure of the forward exchange rate to equal currency traders- expectation of the future spot exchange rate is:

If the nominal exchange is measured in units of domestic currency per unit of foreign currency, then the real exchange rate equals:

If deviations from real interest parity increase over time, then this is evidence of greater integration of international goods and financial markets.

If absolute purchasing power parity holds true, then the real exchange rate equals the nominal exchange rate.

In the presence of a risk premium, which of the following conditions fail to hold true? (I) Uncovered interest parity. (II) Real interest parity. (III) Foreign exchange market efficiency.

If the purchasing power parity and uncovered interest parity conditions simultaneously hold true, then it is unambiguously true that:

Which of the following is not a possible explanation for why significant deviations from covered interest parity were observed during the recent global financial crisis?

If the foreign exchange market efficiency condition is satisfied, then the equilibrium spot and forward exchange adjust to reflect all available information, in which case the forward premium is equal to the expected rate of currency depreciation plus any risk premium.

The real interest rate is a rate of return in current-dollar terms that is equal to the nominal interest rate plus the anticipated rate of inflation.

If the expected proportionate change in the nominal exchange rate, measured in units of domestic currency per unit of foreign currency, is 2 percent and the domestic interest rate is 6 percent, then according to the uncovered interest parity condition, the foreign interest rate should be equal to:

Past information is relevant:

If foreign exchange markets are efficient, then the relative purchasing power parity condition must hold true.

The absolute purchasing power parity condition cannot be satisfied if the law of one price does not hold.

The fundamental concept related to the law of one price is:

If absolute purchasing power parity holds true and the ratio of the domestic price level to the foreign price level is greater than the actual nominal exchange rate, then the domestic currency is currently overvalued.

The forward exchange rate:

If people form expectations adaptively, then their predictions must be correct on average.