An increase in Indonesia's income relative to Malaysia's should result in:

Question

Quizplus · Accepted Answer

An increase in Indonesia's income relative to Malaysia's can be interpreted as an increase in the demand for Indonesian goods, services and assets, leading to an inflow of foreign exchange, which in turn should prompt the appreciation of the rupiah. However, the question asks for the effect on the exchange rate, so we should also consider Malaysia's response. If Malaysia does not keep pace with Indonesia's economic expansion, its goods and assets may become relatively less attractive, leading to a decrease in the demand for the ringgit and causing it to depreciate against the rupiah. Option B matches this reasoning. Options A, C, and D are not supported by economic logic.

An Increase in Indonesia's Income Relative to Malaysia's Should Result