Which of the following statements is consistent with the monetary model of exchange rate determination?
A) A monetary expansion leads to a proportional depreciation of the domestic currency
B) A rise in income levels leads to an appreciation of the domestic currency
C) A rise in foreign price levels leads to an appreciation of the domestic currency
D) All of the given answers

Question

Quizplus · Accepted Answer

The monetary model of exchange rate determination posits that exchange rates are determined by the relative supplies and demands for different countries' monies, which can be influenced by factors such as monetary expansion, income levels, and price levels. A monetary expansion (A) typically leads to a depreciation of the domestic currency due to inflationary pressures. A rise in income levels (B) can lead to an appreciation of the domestic currency as demand for the currency increases. Similarly, a rise in foreign price levels (C) can lead to an appreciation of the domestic currency as the foreign currency becomes less valuable. Therefore, all given answers are consistent with the monetary model.

Which of the Following Statements Is Consistent with the Monetary