The bandwagon effect is an example of the way _____ directly affects foreign exchange rates.
A) exchange rate policy
B) investor psychology
C) purchasing power parity
D) balance of payments

Question

The bandwagon effect is an example of the way _____ directly affects foreign exchange rates.
A) exchange rate policy 
B) investor psychology 
C) purchasing power parity 
D) balance of payments

Quizplus · Accepted Answer

The bandwagon effect is a psychological phenomenon where individuals follow the herd or popular opinion. In the context of foreign exchange markets, if investors perceive a currency to be strong, they will flock to buy it, driving up the exchange rate. Conversely, if investors believe a currency to be weak, they will sell it, causing the exchange rate to decrease. Therefore, the bandwagon effect directly affects foreign exchange rates through investor psychology.

The Bandwagon Effect Is an Example of the Way _____