Question

Generating exchange rate forecasts with the fundamental approach involves

Multiple Choice
a. substituting the estimated values of the dependent variables into the estimated structural model to generate the forecast.
b. looking at charts of the exchange rate and extrapolating the patterns into the future.
c. estimation of a structural model and substitution of the estimated values of the independent variables into the estimated structural model to generate the forecast.
d. estimation of a cyclical model.

Answer 1

The fundamental approach to generating exchange rate forecasts entails creating a structural model and using estimated values of economic indicators to predict future currency movements.

Step-by-step explanation:

Generating exchange rate forecasts with the fundamental approach involves estimation of a structural model and substitution of the estimated values of the independent variables into the estimated structural model to generate the forecast. This method relies on understanding the economic factors that affect currency values, such as interest rates, inflation rates, and the balance of payments, as well as how policy actions may impact a country's GDP and, in turn, its currency strength. Economists create models based on these factors, and by plugging in the expected values of these economic indicators, they can make predictions about future movements in exchange rates.