Business Economics
Interest rate parity is an economic theory that establishes a relationship between interest rates and exchange rates of two currencies, indicating that the difference in interest rates between two countries is equal to the expected change in exchange rates over time. This concept helps explain how capital flows between countries, as investors seek to maximize their returns by considering both interest rates and currency value fluctuations. It highlights the interconnectedness of financial markets and serves as a foundation for understanding how exchange rates adjust to maintain equilibrium.
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