Interest rate and purchasing power parity
Interest rate parity is the method of predicting foreign exchange rate based on the hypothesis
the different between the interest rate in two countries should offset the difference between the
spot rate and the forward foreign exchange rate over the same period.

2 marks

Purchasing power parity is the rate theory that states that the exchange rate between two
currencies is the same in equilibrium when the purchasing power of currency is the same in
each country.

2 marks