Which of the Following Is the Reason for the Failure

question 115

Multiple Choice

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

• A)The impact of investor psychology on short-run exchange rate movements
• B)The strong relationship between inflation rates and interest rates
• C)The impact of interest rates and short-term exchange rate movements
• D)The strong relationship between interest rate differentials and subsequent changes in spot exchange rates
• E)Government intervention in cross-border trade that violates the assumption of efficient markets

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Definitions:

Foreign Currency

Refers to the money or legal tender issued by a country that is not one's own, used to conduct transactions in foreign countries.

Exchange Rate

The price at which one currency can be exchanged for another.

Euros

The eurozone's recognized currency, used by 19 out of the 27 member states of the European Union.

Foreign Exchange Market

A global decentralized or over-the-counter market for trading currencies.