Exchange rates appear to be more volatile than the monetary approach would predict,because:
A) the monetary approach holds better in the short run than in the long run.
B) prices of goods and services adjust instantaneously, while prices of assets are sluggish.
C) prices of goods and services are sluggish to adjust, while prices of assets adjust instantaneously.
D) the monetary approach is based on many unrealistic assumptions so that it fails to predict exchange rates in both short run and long run.

Question

Quizplus · Accepted Answer

The monetary approach to exchange rates suggests that exchange rates are determined by the relative supply and demand for different currencies, which in turn are influenced by factors like inflation and interest rates. However, in reality, the prices of goods and services are often slow to adjust due to factors like contracts, menu costs, and market frictions. On the other hand, asset prices, including currencies, can adjust very quickly to new information due to the more fluid nature of financial markets. This discrepancy can lead to more volatility in exchange rates than the monetary approach would predict, as it assumes a more immediate adjustment in the prices of goods and services.

Exchange Rates Appear to Be More Volatile Than the Monetary