Which of the following is a feature of the 'Uncovered Interest Parity' puzzle or forward-premium puzzle?
A. High-interest currencies tend to appreciate rather than depreciate as uncovered interest parity would predict
B. Forward rates are perfect predictors of future spot rates
C. Interest differentials are always zero
D. High-interest currencies always depreciate as predicted
Answer: Option A
Solution (By JKSSB Mock Tests)
Empirical evidence often shows that currencies with high interest rates tend to appreciate, contrary to the prediction of uncovered interest parity that they should depreciate; this is known as the forward-premium puzzle.
Explanation:
Deadweight loss is the loss of economic efficiency that occurs when the equilibrium quantity is not produced due to taxes, subsidies, monopolies or other market distortions.
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