Using the asset model of short-run exchange rate determination, once the domestic rate of return is determined by MS and MD, the short-run equilibrium _____ can be determined if prices are inflexible and expectations are given.
A) interest rate
B) exchange rate
C) price level
D) income level

Question

Quizplus · Accepted Answer

According to the asset model of short-run exchange rate determination, the exchange rate is determined by the equilibrium between the demand and supply of domestic and foreign assets. Once the domestic rate of return is determined, the exchange rate can be determined if prices are inflexible and expectations are given. Therefore, the correct answer is option B, exchange rate.

Using the Asset Model of Short-Run Exchange Rate Determination, Once