Which one of the following statements is the MOST accurate?
A) For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal.
B) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal.
C) For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
D) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
E) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal.

Question

Quizplus · Accepted Answer

A rise in domestic output implies a higher demand for domestic goods and services, which leads to an increase in demand for the domestic currency. This, in turn, causes an appreciation of the domestic currency to restore equilibrium in asset markets. All else equal, an increase in output would also lead to a decrease in the demand for foreign currency, which would further contribute to the appreciation of the domestic currency.

Which One of the Following Statements Is the MOST Accurate