What approach assumes that assets are imperfect substitutes internationally because investors perceive foreign exchange risk to be attached to foreign assets?
A) Balance of payments approach
B) Equilibrium approach
C) Portfolio-balance approach
D) Trade balance approach

Question

Quizplus · Accepted Answer

The portfolio-balance approach assumes that assets are imperfect substitutes internationally because investors perceive foreign exchange risk to be attached to foreign assets. This means that investors demand a risk premium to hold foreign assets, which affects the exchange rate. The balance of payments approach focuses on the flow of international transactions, the equilibrium approach assumes that exchange rates adjust to maintain a balance between supply and demand for currency, and the trade balance approach focuses on the relationship between trade balances and exchange rates.

What Approach Assumes That Assets Are Imperfect Substitutes Internationally Because