Question
Two countries (A and B) have floating exchange rate systems. When comparing A and B's statistics, an FX trader concludes that (i) A is growing
Two countries (A and B) have floating exchange rate systems. When comparing A and B's statistics, an FX trader concludes that (i) A is growing twice as fast than B; (ii) A's Central Bank is running a much tighter monetary policy, because its rate of growth in the money supply is 1/2 of that in A; and (iii) interest rates in A are twice the level of B. The quote is European, with CurrencyA/Currency B where A is the quote currency. Based on this information mark the only CORRECT answer:
a. | The exchange rate $A/$B is likely be unaffected by these variables | |
b. | There is not enough information to form an opinion about the direction of the exchange rate $A/$B | |
c. | It is likely that country A's exchange rate will appreciate relative to B's | |
d. | It is likely that country A's exchange rate will depreciate relative to B's |
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