One way to understand the short-run behaviour of exchange rates is ________.

Question

Quizplus · Accepted Answer

Using the theory of portfolio choice can help explain the short-run behaviour of exchange rates by looking at how investors allocate their funds among different currencies. Understanding that the exchange rate is the price of one asset in terms of another is also crucial in analyzing short-run movements. Examining long-run trends may not provide much insight into short-term fluctuations. Therefore, using both A and B can help us better understand short-run exchange rate movements.

One Way to Understand the Short-Run Behaviour of Exchange Rates