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Questions › UGC-NET › UGC-NET 2023 › Q49
2 marksInternational Economics › Balance of payments and exchange rates › Interest parity: covered and uncoveredHardabout 2 min

UGC-NET 2023 Question 49: Balance of payments and exchange rates

Suppose India is the home country and USA is the foreign country. Interest rate in India is 3%, in the US 1%. The Rs-$ exchange rate is Rs. 80 per USD spot and Rs. 81 per USD in the 3-month forward market. Which of the following are true for the resulting covered interest arbitrage flows?

(A) Indian Rupee will depreciate in spot market

(B) Indian Rupee will depreciate in forward market

(C) Interest rate will decline in India

(D) Interest rate will decline in US.

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Balance of payments and exchange rates has come up 120 times in 7 exams since 2007.

What this question tests

This question is on Interest parity: covered and uncovered, part of Balance of payments and exchange rates in International Economics.

How interest differentials and expectations tie exchange rates to interest rates.

TestStop has 9 past-paper questions on this subtopic.

Take this paper as a timed mockMore on Interest parity: covered and uncovered

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Question from the UGC-NET 2023 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.