In the long run,exchange rates are primarily determined by:
A) Agreements among governments of the world's industrial countries
B) Relative interest rates in developing countries and industrial countries
C) Economic fundamentals such as relative productivity levels
D) The rate at which country's currencies exchange for gold

Question

Quizplus · Accepted Answer

Economic fundamentals such as trade balances, inflation rates, and relative productivity levels have a significant impact on exchange rates in the long run. For example, a country with a strong economy and high productivity levels relative to other countries will be able to produce goods at a lower cost, which will make its currency more attractive to foreign investors. On the other hand, countries with weaker economies and higher inflation rates will see their currencies depreciate. While interest rates can have a short-term impact on exchange rates, they are ultimately driven by economic fundamentals in the long run. Agreements among governments and the gold exchange rate are not significant determinants of exchange rates in modern times.

In the Long Run,exchange Rates Are Primarily Determined By