41. The asset market approach to exchange rates
emphasizes the role of portfolio repositioning by international financial
42. If the domestic interest rate increases, while
the foreign interest rate and the spot exchange rate expected at some
appropriate time in the future remain constant, the return comparison shifts in
favor of investments in bonds denominated in the foreign currency.
43. Expectations are destabilizing if they are
based on the belief that exchange rates eventually return to the values
consistent with basic economic conditions.
44. The law of one price works well for heavily
traded commodities, either at a point in time or for changes over time.
45. The law of one price does not hold closely for
most products that are traded internationally, including nearly all
46. Economists believe that money demand
determines the price level in the long run.
quantity theory of money says that in any country the money supply is equated
to the demand for money, which is directly proportional to the money value of
the gross domestic product.
48. Over the long-run, a country with a relatively
high inflation rate tends to have a depreciating currency.
49. Exchange rates are much more
volatile in the long-run than in the short-run.
50. Models designed to predict
short-run exchange rate fluctuations are more accurate than models designed to
predict long-run trends.
51. The law of one price is based on
the purchasing power parity theory.
52. Purchasing power parity theory
holds more under monetary shocks than real shocks.
53. Real exchange rate can be
used as an indicator of a countryâ€™s international price competitiveness.
54. Purchasing power parity theory
holds more for input prices (wages) than product prices.
55. The asset market approach
seeks to explain exchange rates by focusing on demands and supplies of national