According to the Monetary Approach,expectation Can Play a Major Role

question 51

Multiple Choice

According to the monetary approach,expectation can play a major role in the determination of exchange rate.If between US and EMU there is a significant interest rate differential (US interest rate is significantly higher than the EMU interest rate) but at the same time dollar is also expected to depreciate in the future by more than the positive interest differential,then which of the following is most likely to happen?

• A)Dollar will depreciate
• B)Dollar will appreciate
• C)There will be a significant increase in the supply of Euro in the US
• D)There will be a significant decrease in the demand for Euro

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Definitions:

Investment

The allocation of resources (such as capital or time) with the expectation of receiving future returns.

Fair Value

The price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Unrealized Profits

Profits that have occurred on paper due to an asset's increased value but have not yet been cashed in by selling the asset.

Realized Profits

Refers to the gains earned and received from the sale of assets or investments, distinguished from those merely existing on paper.