The monetary approach basically looks at ____ as the fundamental variable affecting _____ exchange rates.
A) interest rates; short-run
B) interest rates; long-run
C) the price level; short-run
D) the price level; long-run

Question

Quizplus · Accepted Answer

The monetary approach looks at the price level as the fundamental variable affecting long-run exchange rates. This approach suggests that changes in a country's money supply and the consequent changes in the price level will eventually affect the exchange rate in the long run. Interest rates are also considered important in the monetary approach, but only as a short-run factor that affects the demand for a currency.

The Monetary Approach Basically Looks at ____ as the Fundamental