Which one of the following statements is the most accurate?
A) For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by a depreciation of domestic currency, all else equal.
B) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by a depreciation of foreign currency, all else equal.
C) For asset markets to remain in equilibrium, a rise in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
D) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of domestic currency, all else equal.
E) For asset markets to remain in equilibrium, a fall in domestic output must be accompanied by an appreciation of foreign currency, all else equal.

Question

Quizplus · Accepted Answer

According to the interest rate parity theory, a rise in domestic output would increase the demand for domestic currency, causing an appreciation of the currency. This would be necessary to maintain equilibrium in asset markets. Similarly, a fall in domestic output would decrease the demand for domestic currency, causing a depreciation. Therefore, option C is the most accurate statement.

Which One of the Following Statements Is the Most Accurate