Interest Rate Parity and Exchange Rate Equilibrium Diagram #1665405 (License: Personal Use)

This diagram illustrates uncovered interest rate parity (UIP), where the vertical line RoR$_s$ represents the domestic risk-free return and the downward-sloping curve RoR$_£$ reflects the foreign return adjusted for expected exchange rate changes. Their intersection at (i$_s$, E′) identifies the equilibrium where investors are indifferent between domestic and foreign assets. The axes denote exchange rate (E in $/£) and interest rate differential, respectively.

Used in international finance textbooks, economics courses, and financial analysis webpages to explain how interest differentials drive exchange rate expectations; targets students, educators, and professionals seeking foundational macroeconomic models.