Generating exchange rate forecasts with the fundamental approach involves
A)looking at charts of the exchange rate and extrapolating the patterns into the future.
B)estimation of a structural model.
C)substituting the estimated values of the independent variables into the estimated structural model to generate the forecast.
D)estimation of a structural model and substitution of the estimated values of the independent variables into the estimated structural model to generate the forecast.

Question

Quizplus · Accepted Answer

The fundamental approach involves estimating a structural model and then substituting the estimated values of the independent variables into the estimated structural model to generate the forecast. This approach considers economic factors such as inflation, interest rates, and trade balances. Option A is incorrect as it suggests using only the exchange rate chart. Option B is partially correct as it involves estimation of a structural model, but it does not generate the forecast. Option C is incorrect as it only involves substituting estimated values but does not account for a structural model.

Generating Exchange Rate Forecasts with the Fundamental Approach Involves