When analyzing the complete model, which can predict short-run and long-run changes in the exchange rate, one must:
A) start with short-run changes and move toward long-run changes, and thereby determine expectations.
B) use only the long-run model because the short-run model is largely irrelevant.
C) start with the long-run equilibrium positions where expectations of future exchange rates can be determined and use those expectations to feed into the short-run model.
D) use the short-run model only, because the long run is only a theoretical concept.

Question

Quizplus · Accepted Answer

Starting with the long-run equilibrium positions allows the analyst to determine expectations of future exchange rates, which can then be used in the short-run model to predict short-term changes. This approach takes into account both short- and long-term factors that affect exchange rates and provides a more comprehensive analysis.

When Analyzing the Complete Model, Which Can Predict Short-Run and Long-Run