Explaining exchange rate behavior in the long run assumes that changes in price levels and real interest rates affect nominal exchange rates so that interest parity and PPP hold. Short-run deviations from PPP may be explained by an alternative theory called the:
a. relative PPP approach.
b. asset approach to exchange rate determination.
c. long-run equilibrium approach.
d. law of one price.
Ans: b. asset approach to exchange rate determination.
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