Which of the Following Is True Regarding Forecast Errors

question 42

Multiple Choice

Which of the following is true regarding forecast errors?

• A) Forecasts for the Chinese yuan are likely to have large forecast errors because the yuan is a volatile currency.
• B) Potential forecast errors may vary depending on the time horizon, the currency's volatility, and whether the country issuing the currency is experiencing political problems.
• C) Forecasts for currencies in high-inflation countries will be more accurate if they use the spot rate rather than the forward rate because the spot rate captures the difference in interest rates (and thus inflation rates) between two countries.
• D) Potential forecast errors may vary depending on the time horizon, the currency's volatility, and whether the country issuing the currency is experiencing political problems AND forecasts for currencies in high-inflation countries will be more accurate if they use the spot rate rather than the forward rate because the spot rate captures the difference in interest rates (and thus inflation rates) between two countries.

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Definitions:

Active Economic Policy

Government interventions aimed at influencing the economy through measures such as fiscal and monetary policies to achieve specific macroeconomic objectives.

Law of Diminishing Returns

An economic principle stating that adding an additional factor of production results in smaller increases in output after a certain point.

Rational Expectations

A school of thought that argues people form expectations based on all available information, including the likely future actions of government policymakers.

Expansionary Monetary Policy

A strategy employed by central banks to increase the money supply and decrease interest rates to stimulate economic growth.