Use the Portfolio-Balance Approach to answer this question.Other things remaining constant,if the supply of domestic 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

According to the Portfolio Balance Approach, an increase in the supply of domestic bonds will lead to a decrease in their price, making them less attractive to investors. As a result, investors will shift their investment to foreign bonds, increasing the demand for foreign currency and decreasing the demand for the domestic currency. This will lead to a depreciation of the domestic currency.

Use the Portfolio-Balance Approach to Answer This Question