When all variables start out at their long-run equilibrium levels,the most important determinant of long-run swings in nominal exchange rates is
A)a shift in relative money supply levels.
B)a shift in relative money supply growth rates.
C)a change in relative output demand.
D)a change in relative output supply.
E)a change in relative inflation rates.

Question

Quizplus · Accepted Answer

When all variables start out at their long-run equilibrium levels, the most important determinant of long-run swings in nominal exchange rates is a change in relative inflation rates. This is because differences in inflation rates lead to differences in purchasing power between two currencies, which in turn affects their exchange rates in the long run. Thus, option E is the best choice.

When All Variables Start Out at Their Long-Run Equilibrium Levels,the