According to the Theory of Optimum Currency Areas

question 65

Multiple Choice

According to the theory of optimum currency areas,

• A)the relevant criterion for identifying and designing a common currency zone is the degree of factor (i.e. capital and labor) mobility within the zone.
• B)exchange rates should reflect the degree to which workers are willing to move to get a better job.
• C)exchange rates are determined by portfolio managers seeking the highest return.
• D)none of the above.

---

Definitions:

Real Interest Rate

The interest rate adjusted for inflation, reflecting the real cost of borrowing and the real yield to investors.

Nominal Rate

The interest rate before adjustments for inflation, representing the face value of financial transactions.

Rate of Inflation

The measure of the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Net Present Value

The present value of cash flows minus the present value of cash outlays, used in capital budgeting to assess the profitability of an investment or project.