The large and liquid capital and currency markets follow many of the principles outlined by the different schools of thought on exchange rate determination (parity conditions, balance of payments approach, and asset approach) relatively well in the medium to long term.

Question

Quizplus · Accepted Answer

While there may be short-term fluctuations and deviations from the principles outlined by different schools of thought, in the medium to long term, the large and liquid capital and currency markets tend to follow these principles relatively well. This is due to the fact that significant price discrepancies or imbalances in exchange rates, balance of payments, or asset values tend to attract market participants who aim to profit from these discrepancies through arbitrage or other trading strategies, which ultimately serves to bring markets back into alignment with these fundamental principles.

The Large and Liquid Capital and Currency Markets Follow Many