A rise in interest rates is expected to lead to an appreciation of the currency, and a drop in interest rates is expected to lead to a depreciation.

A nominal anchor is a commitment to keep nominal variables within limits, often tied to an external value or price. When nations do not incorporate such discipline into their monetary policy, exchange rates are often:

a. irrelevant to economic activity. b. extremely volatile, because traders consider monetary shocks to be permanent. c. less dependent on monetary variables. d. determined by political considerations rather than economic fundamentals.

A critical assumption in the model of demand and supply is the independence of demand and supply curves. If the two are not independent, a shift in the supply curve can lead to a shift in the demand curve referred to as

a. supply-side economics. b. supplier-induced demand. c. supply shocks. d. ceteris paribus. e. the fallacy of supply.