The authors compromise as to the key factors for exchange rate determination. They conclude that ________ is important in the short run, but that ________ determines long run exchange rates.
A) Fisher effect; PPP
B) asset markets, interest rates, and expectations; PPP
C) PPP; Fisher effect
D) Fisher effect; asset prices, interest rates, and expectations

Question

Quizplus · Accepted Answer

The authors conclude that asset markets, interest rates, and expectations are important factors in the short run, but that PPP (purchasing power parity) determines long run exchange rates. This is in contrast to the Fisher effect, which relates to the relationship between nominal interest rates, inflation, and real interest rates.

The Authors Compromise as to the Key Factors for Exchange