- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics
- Reading 10. Currency Exchange Rates: Understanding Equilibrium Value
- Subject 6. Monetary and Fiscal Policies
CFA Practice Question
In the Taylor rule framework, the value of a currency is negatively correlated to:
A. relative inflation gap.
B. relative output gap.
C. relative risk premium.
Explanation: For example, the value of the euro will increase against the U.S. dollar if there is a decrease in the risk premium demanded for holding euro-denominated assets relatively to the risk premium on dollar-denominated assets.
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