In the asset market or portfolio balance approach, other things equal, a depreciation of the home currency would be caused by __________ in inflationary expectations in the home country and by __________ in real income in the home country.
A) an increase; an increase
B) an increase; a decrease
C) a decrease; an increase
D) a decrease; a decrease

Question

Quizplus · Accepted Answer

An increase in inflationary expectations in the home country would lead to a depreciation of the home currency because investors would demand higher returns to compensate for the expected loss in purchasing power, making domestic assets less attractive. A decrease in real income in the home country would also lead to a depreciation of the home currency because it would imply lower economic growth prospects, making domestic assets less attractive to investors.

In the Asset Market or Portfolio Balance Approach, Other Things