Does the signalling effect of foreign exchange intervention ...

[formula1]

Does the signalling effect of foreign exchange intervention support or refute the claim that assets cannot be perfect substitutes if sterilized intervention is going to have any effect? Please explain.
 
  What will be an ideal response?

Question 2

Which one of the following statements is MOST accurate?
 
  A) In general, consumption demand rises by less than disposable income.
  B) In general, consumption demand rises by more than disposable income.
  C) In general, consumption demand rises by more than income.
  D) In general, consumption demand rises by the same amount as disposable income rises.
  E) In general, consumption demand rises are unrelated to disposable income rises.

[debra928]

Answer to Question 1

The signalling effect refutes the claim. Even with the assumption of perfect asset substitutability, if the market is unsure of the future direction of policy, then sterilized intervention can fix a market's expectations about the exchange rate in the future. From post discussion, a change in the expected exchange rate will lead to a change in the exchange rate today.

Answer to Question 2

A

[formula1]

Excellent

[alexanderhamilton]

TYSM