What assumptions are made to create a model to determine short-run changes in exchange rates using the asset approach?
A) Prices are completely flexible.
B) In the long run, money is neutral.
C) Prices are sticky, yet nominal interest rates are flexible.
D) Prices and nominal interest rates are sticky.

Question

Quizplus · Accepted Answer

The asset approach assumes that prices are sticky in the short run, but nominal interest rates are flexible. This is because changes in interest rates affect the demand for and supply of assets denominated in different currencies, which in turn affects exchange rates. Options A and B are incorrect as they refer to assumptions made in the long run, while option D is incorrect as it assumes both prices and nominal interest rates are sticky.

What Assumptions Are Made to Create a Model to Determine