Use the Portfolio-Balance Approach to answer this question.Other things remaining constant,if the supply of foreign bonds increases,what would happen to the domestic currency?
A) The domestic currency would appreciate.
B) The domestic currency would depreciate.
C) The domestic currency would not change.
D) The domestic currency would sharply depreciate and then appreciate later.

Question

Quizplus · Accepted Answer

The increase in the supply of foreign bonds makes them more attractive to domestic investors, leading to an increase in demand for foreign bonds and a decrease in demand for domestic currency. This causes the domestic currency to depreciate.

Use the Portfolio-Balance Approach to Answer This Question