Under a system of flexible exchange rates, the portfolio balance approach suggests that an increase in real income in a home country will lead to __________ of that country's Currency; under flexible rates, the monetary approach suggests that an increase in real Income in a home country __________ of that country's currency.
A) a depreciation; will lead to an appreciation
B) a depreciation; also will lead to a depreciation
C) an appreciation; also will lead to an appreciation
D) an appreciation; will lead to a depreciation

Question

Quizplus · Accepted Answer

The portfolio balance approach suggests that an increase in real income in a home country will lead to an appreciation of that country's currency because higher income increases the demand for money, which, assuming a fixed supply, increases the value of the currency. Similarly, the monetary approach suggests that an increase in real income, by increasing the demand for money relative to supply, will also lead to an appreciation of the currency, as the increased demand for the currency (to facilitate more transactions) pushes its value up.

Under a System of Flexible Exchange Rates, the Portfolio Balance