Question

The demand for domestic currency depends on

	a) A rise in the domestic income
	b) Price of goods
	c) Foreign tastes for domestic goods
	d) Domestic tastes for foreign goods
	e) A and d

Answer 1

The demand for domestic currency would depend on the factors which can alter the need for domestic currency. Among the given options, a rise in the domestic income would imply the need of additional currency to be circulated in the economy. Note that, the price of goods will not determine the demand for domestic currency. A change in the price of goods would lead to a shift of currency from one agent to another within the economy. Foreign taste for domestic goods would decide the demand for foreign currency and not domestic currency.

Domestic tastes for foreign goods would determine the need for additional domestic currency to be paid to the agents outside the economy.

Thus, The demand for domestic currency depends on

1. A rise in the domestic income

2. Domestic taste for foreign goods.

Thus, Option E is the correct answer.