Which theory of exchange-rate determination best views the foreign exchange market as being similar to a stock exchange where future expectations are important and prices are volatile?
A) Balance-of-payments approach
B) Purchasing-power-parity approach
C) Asset-markets approach
D) Monetary approach

Question

Quizplus · Accepted Answer

The asset-markets approach views the foreign exchange market as being similar to a stock exchange, where future expectations are crucial, and prices are volatile. This approach focuses on the supply and demand of financial assets, such as bonds, stocks, and other securities, which influence exchange rates. In contrast, the balance-of-payments approach looks at the current account balance, while the purchasing-power-parity approach concentrates on the relative price levels of goods and services in different countries. The monetary approach emphasizes the role of monetary and fiscal policies in determining exchange rates. Thus, the asset-markets approach is the best choice for this question.

Which Theory of Exchange-Rate Determination Best Views the Foreign Exchange