Which of the following is a feature of the 'Covered Interest Parity' condition?
A. Exchange rates are fixed
B. Only uncovered interest parity holds
C. The interest differential between two countries equals the forward premium or discount on the exchange rate
D. Interest rates are always equal across countries
Answer: Option C
Solution (By JKSSB Mock Tests)
Covered interest parity states that the interest rate differential between two currencies equals the forward premium or discount, eliminating covered arbitrage opportunities.
Explanation:
Buffer-stock models emphasise that money balances serve as a short-run shock absorber, allowing agents to smooth consumption in the face of transitory income or expenditure shocks.
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