When domestic and foreign assets are imperfect substitutes, an increase in the supply of domestic assets
A)implies greater exchange rate risk.
B)implies lower exchange rate risk.
C)raises the exchange rate.
D)implies lower exchange rate risk and raises the exchange rate.

Question

Quizplus · Accepted Answer

When domestic and foreign assets are imperfect substitutes, an increase in the supply of domestic assets implies greater exchange rate risk because investors may demand a premium for holding more of the riskier assets, affecting the exchange rate's stability.

When Domestic and Foreign Assets Are Imperfect Substitutes, an Increase