Question

An increase in a country's real income causes the nominal interest rate to ____ and the currency to ____.

A

rise; appreciate

B

rise; depreciate

C

fall; appreciate

D

fall; depreciate

Answer 1

An increase in the real income will shift money demand curve to the right which will result in increase in interest rate and thus interest rate will rise. Thus option (C) and (D) are incorrect.

If real income increases, then people will import more goods from foreign and thus Net Exports will decrease. This will shift Net exports curve(which is a function of exchange rate) downward and thus exchange rate will decrease and hence, currency will depreciate.

Hence the correct answer is (B) rise; depreciate.

answered by: anonymous