Question

question 4 (1 point)
interest parity in the fx market can be maintained only if:
domestic and foreign interest rates are equal.
the domestic central bank adjusts money supply for foreign money supply changes.
the domestic currency exchange rate remains fixed.
domestic monetary policy matches foreign monetary policy changes.
caution
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Explanation:

To determine the correct answer, we analyze each option:

• Option 1: Interest parity doesn't require domestic and foreign interest rates to be equal. It relates to the relationship between interest rates and exchange rates, so this is incorrect.
• Option 2: For interest parity in the FX market, when foreign money supply changes (affecting foreign interest rates), the domestic central bank adjusting its money supply (to adjust domestic interest rates) helps maintain the interest - rate differential consistent with exchange rate expectations, which is key for interest parity. This option is correct.
• Option 3: Interest parity is relevant for both fixed and floating exchange rate regimes. It's not dependent on the exchange rate being fixed, so this is incorrect.
• Option 4: Domestic monetary policy doesn't need to "match" foreign monetary policy changes exactly. It needs to adjust in a way that maintains the appropriate interest - rate differential for interest parity, not just a direct match. So this is incorrect.

Answer:

B. The domestic central bank adjusts money supply for foreign money supply changes.