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Which of the following factors is most important determining short-run foreign exchange rates ? O A. relative inflation rates O B. relative interest rates

Which of the following factors is most important determining short-run foreign exchange rates ? O A. relative inflation rates O B. relative interest rates

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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### Determining Short-Run Foreign Exchange Rates #### Question: Which of the following factors is most important in determining short-run foreign exchange rates? #### Options: - **A.** Relative inflation rates - **B.** Relative interest rates - **C.** Relative population growth rates - **D.** None of the above ### Explanation: This multiple-choice question addresses the factors that influence foreign exchange rates in the short term. Understanding these elements is crucial for comprehending international finance dynamics. 1. **Relative Inflation Rates:** - Inflation affects the purchasing power of a country's currency. Higher inflation typically depreciates a currency as it lowers its value relative to currencies of countries with lower inflation rates. 2. **Relative Interest Rates:** - Interest rates impact currency value by influencing investment flows. Higher interest rates offer better returns on investments in that currency, thus attracting foreign capital and appreciating the currency. 3. **Relative Population Growth Rates:** - Population growth impacts long-term economic potential rather than short-term currency movements. High population growth can indicate a growing economy, but it doesn't directly affect currency value in the short run. 4. **None of the Above:** - This option is usually selected when none of the provided factors align with the best-practice financial theories or empirical evidence on what influences short-run exchange rate movements. The answer usually preferred by economists for short-run foreign exchange rate determination is **B. Relative interest rates**. This is because changes in interest rates directly affect investor behavior, influencing short-term capital flows and, consequently, the exchange rate.
Transcribed Image Text:### Determining Short-Run Foreign Exchange Rates #### Question: Which of the following factors is most important in determining short-run foreign exchange rates? #### Options: - **A.** Relative inflation rates - **B.** Relative interest rates - **C.** Relative population growth rates - **D.** None of the above ### Explanation: This multiple-choice question addresses the factors that influence foreign exchange rates in the short term. Understanding these elements is crucial for comprehending international finance dynamics. 1. **Relative Inflation Rates:** - Inflation affects the purchasing power of a country's currency. Higher inflation typically depreciates a currency as it lowers its value relative to currencies of countries with lower inflation rates. 2. **Relative Interest Rates:** - Interest rates impact currency value by influencing investment flows. Higher interest rates offer better returns on investments in that currency, thus attracting foreign capital and appreciating the currency. 3. **Relative Population Growth Rates:** - Population growth impacts long-term economic potential rather than short-term currency movements. High population growth can indicate a growing economy, but it doesn't directly affect currency value in the short run. 4. **None of the Above:** - This option is usually selected when none of the provided factors align with the best-practice financial theories or empirical evidence on what influences short-run exchange rate movements. The answer usually preferred by economists for short-run foreign exchange rate determination is **B. Relative interest rates**. This is because changes in interest rates directly affect investor behavior, influencing short-term capital flows and, consequently, the exchange rate.
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