In an open economy under flexible exchange rates, an increase in wealth that causes an increase in consumption will cause which of the following?
A) A decrease in the exchange rate.
B) A decrease in output.
C) An appreciation of the domestic currency.
D) An increase in net exports.
E) A decrease in taxes.

Question

Quizplus · Accepted Answer

An increase in consumption leads to an increase in demand for goods and services, which in turn increases demand for the domestic currency to purchase those goods and services. This increase in demand for the domestic currency leads to an appreciation of the domestic currency under flexible exchange rates.

In an Open Economy Under Flexible Exchange Rates, an Increase