The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.
A) balance of payments
B) monetary
C) asset market
D) law of one price

Question

Quizplus · Accepted Answer

The balance of payments approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities (such as imports and exports) is equal to the net outflow of foreign exchange arising from financial account activities (such as capital flows and investment). This approach takes into account both the demand for foreign currency from international trade and the supply of foreign currency from international capital movements.

The ________ Approach Argues That Equilibrium Exchange Rates Are Achieved