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:

Rate of Return

The gain or loss on an investment over a specified period, expressed as a percentage of the investment's initial cost.

Discounted Cash Flow (DCF) Analysis

A financial valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for time value of money.

Discount Factor

A multiplier used in discounted cash flow analysis to present value future cash flows.

Discount Rate

In finance, the interest rate used to discount future cash flows to their present value, often reflecting the risk or time value of money.