Which of the following is a feature of the 'Portfolio Balance' approach to exchange-rate determination?
A. Interest rates are irrelevant
B. Only goods-market equilibrium determines the exchange rate
C. Exchange rates are determined by the relative supplies of and demands for domestic and foreign assets
D. Only purchasing-power parity matters
Answer: Option C
Solution (By JKSSB Mock Tests)
The portfolio-balance approach treats the exchange rate as the relative price of domestic and foreign assets and emphasises imperfect substitutability among assets denominated in different currencies.
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