Which of the following determines the exchange rate between two currencies in the long run?
A) Relative interest rates
B) Relative output levels
C) Expectations of future exchange rates
D) Relative price levels
E) Expectations of future interest rates.

Question

Quizplus · Accepted Answer

The relative price levels of two countries in the long run will determine the exchange rate between their currencies. This is because the exchange rate is based on the purchasing power of the currencies, and the relative price levels reflect the relative purchasing power of the currencies. Higher inflation in one country will lead to a decrease in the value of its currency relative to the other country's currency, which will cause an increase in the exchange rate in the long run.

Which of the Following Determines the Exchange Rate Between Two