To arrive at a complete theory of exchange rate determination, we use:
A) the short-run monetary approach, the long-run monetary approach, and a good dose of common sense.
B) the short-run asset approach, the long-run monetary approach, and real interest parity.
C) real-world phenomena such as sticky prices, government inefficiency, and imperfect markets.
D) information on financial markets, political realities, and the large government debt.

Question

Quizplus · Accepted Answer

The short-run asset approach, the long-run monetary approach, and real interest parity provide a comprehensive framework for exchange rate determination that considers both short- and long-term factors affecting currency values, as well as the role of financial markets and interest rate differentials. This approach also acknowledges the importance of the real economy and trade flows in determining exchange rates. While factors such as sticky prices, government inefficiency, and imperfect markets may influence exchange rates in certain contexts, they are not as central to a complete theory of exchange rate determination as the approaches and concepts included in option B. Information on financial markets, political realities, and government debt are also important considerations, but they are best seen as inputs into the broader framework provided by option B, rather than alternative approaches to exchange rate determination.

To Arrive at a Complete Theory of Exchange Rate Determination