Question

A rise in foreign exchange rates merely anticipates the movement of domestic commodity prices. This statement is associated with the:

a. Interest Parity Theory.

b. Balance-of-Payments (BOP) Theory of Foreign Exchange.

c. Purchasing Power Parity (PPP) Theory of Foreign Exchange.

d. Monetary Approach to BOP Theory.

Answer 1

Interest rate parity theory associated with the interest rates in the respective countries where they affect the the foreign exchange rates and Balance of payments theory is associated with the net balance of payments in the respective country and how they actually affect the foreign exchange rates. The monetary approach also tells about the disequilibrium in the Balance of payments and how they affect the flexible exchange rates on the whole and because all the three mentioned above are not associated with the commodity prices

Therefore (a,b,d) are wrong

It can be mentioned that the commodity prices are associated with that of the purchasing power parity where the purchasing power parity tells how the change in price in commodities of various countries affect the exchange rate for how the currency is depreciated or appreciated by the change in prices.

Therefore (c) is the answer to this question