The following example supports which extension to the Monetary Approach to Exchange rates: The cost of holding a U.S.dollar rises relative to the cost of holding U.K.Pounds.The demand shifts away from dollars to Pounds.
A) General equilibrium approach
B) Trade balance approach
C) Overshooting approach
D) Currency substitution approach

Question

Quizplus · Accepted Answer

The scenario describes a situation where individuals shift their preference from holding one currency to another due to changes in holding costs, which aligns with the currency substitution approach. This approach focuses on the choices between different currencies for transactions and reserves, influenced by changes in relative costs or returns.

The Following Example Supports Which Extension to the Monetary Approach