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Which theory is used to make long-run pr...

Which theory is used to make long-run predictions about exchange rates in a flexible exchange rate system?

A

Purchasing Power Parity Theory

B

Balance of Payment Theory

C

Interest Rate Approach

D

Portfolio Balance Approach

Text Solution

Verified by Experts

The correct Answer is:
A
The Purchasing Power Parity (PPP) theory is used to make long-run predictions about exchange rates in a flexible exchange rate system.
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Knowledge Check

  • When exchange rate falls :

    A
    Exports become cheaper
    B
    Exports become costlier
    C
    Imports become costlier
    D
    No effect on exports or imports

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