Which Theory of Exchange-Rate Determination Best Views the Foreign Exchange

question 51

Multiple Choice

Which theory of exchange-rate determination best views the foreign exchange market as being similar to a stock exchange where future expectations are important and prices are volatile?

• A) Balance-of-payments approach
• B) Purchasing-power-parity approach
• C) Asset-markets approach
• D) Monetary approach

---

Definitions:

Consumption

The portion of income spent on goods and services rather than saved.

Billion

A number equivalent to one thousand million (1,000,000,000) or, in some number systems, a million million (1,000,000,000,000).

Saving

The portion of income not spent on current consumption but set aside for future use, often in a deposit account or as an investment.

Disposable Income

The sum of funds a family can use for expenditures and savings once income taxes are deducted.