The Difference Between the Simple Monetary Model and the General

question 87

Multiple Choice

The difference between the simple monetary model and the general monetary model of exchange rate determination in the long run is that:

• A) the simple model refers to only one nation, while the general model includes all nations.
• B) the simple model has only one equation, while the general model includes a number of simultaneous equations.
• C) the simple model assumes a constant demand function for real balances, while the general model assumes that the demand for real balances is a decreasing function of the nominal interest rate.
• D) the general model applies to increases and decreases in the relevant variables; the simple model does not allow relevant variables to decrease.

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Definitions:

Cross-Rate

An exchange rate between two currencies derived from their respective relations with a third currency.

Foreign Currency

Money or legal tender issued by a country that is not the domestic currency where a particular transaction is taking place.

Exchange Rates

The rate at which one currency is exchanged for another, indicating the quantity of one currency that can be traded for another.

Appreciates

Describes when the value of an asset increases over time in comparison to its original cost.