Final Exam

Question 1

Determinants - Parity Conditions

Answer 1

1. Relative inflation rates
2. Relative interest rates
3. Forward exchange rates
4. Interest rate parity

Question 2

Determinants - Asset Market

Answer 2

1. Relative real interest rates
2. Prospects for economic growth
3. Supply and demand for assets
4. Outlook for political stability
5. Speculation and liquidity
6. Political risks and controls

Question 3

Determinants - BOP

Answer 3

1. Current account balances
2. Portfolio investment
3. Foreign direct investment
4. Exchange rate regimes
5. Official monetary reserves

Question 4

Monetary Approach

Answer 4

the exchange rate is the relative price of monies [money stocks]. Not widely used.

Question 5

Purchasing Power Parity Approach

Answer 5

the exchange rate is the relative price of goods. Most widely accepted. Drawback - structural differences and data challenges

Question 6

Asset Market Approach

Answer 6

the exchange rate is the relative price of bonds