The overriding factor in analyzing long-run changes in the exchange rate is:
A) the exchange rate in the period t - 1.
B) how a permanent change in the supply of money is transmitted to prices and interest rates.
C) the reaction of traders as they conduct arbitrage and speculation.
D) the notion that there is no long run, only a series of short-run measurements.

Question

Quizplus · Accepted Answer

Long-run changes in exchange rates are primarily influenced by changes in the supply of money and how these changes are reflected in price and interest rate movements. This is because the exchange rate is ultimately determined by the supply and demand of currencies in the foreign exchange market. A permanent change in the supply of money can affect price levels and interest rates in the economy, which can in turn influence demand for the domestic currency and affect the exchange rate over the long run. The other options, such as the exchange rate in the previous period or trader behavior, may have some influence on short-term fluctuations in exchange rates, but are not as significant in shaping long-term trends. The notion that there is no long run is also incorrect, as there are many economic factors that can impact the exchange rate over extended periods of time.

The Overriding Factor in Analyzing Long-Run Changes in the Exchange