When a country uses a flexible exchange rate, a(n) _____ will cause its currency to depreciate in the foreign exchange market.
A) increase in interest rates abroad
B) decrease in domestic interest rates
C) decrease in foreign income
D) All of these answers are correct.

Question

Quizplus · Accepted Answer

A flexible exchange rate means that the value of a country's currency is determined by supply and demand in the foreign exchange market. Therefore, any factor that shifts the supply or demand curves for its currency can affect its exchange rate. An increase in interest rates abroad can make the foreign currency more attractive, decreasing the demand for the domestic currency and causing it to depreciate. Similarly, a decrease in domestic interest rates can make the domestic currency less attractive, increasing the supply of the currency and causing it to depreciate. A decrease in foreign income can also decrease the demand for the domestic currency and cause it to depreciate. Therefore, all of these factors can cause a flexible exchange rate currency to depreciate.

When a Country Uses a Flexible Exchange Rate, A(n) _____