Which of the theories of exchange rate determination states the following? "Increase in the nation's money supply leads to an immediate decline in the interest rate in the nation and a shift from domestic bonds to the domestic currency and foreign bonds……A shift to foreign bonds will then cause an immediate depreciation of the home currency……Overtime this depreciation stimulates nation's exports and discourages the nation's imports."

Question

Quizplus · Accepted Answer

This description aligns with the Asset or Portfolio Models of Exchange Rates, which emphasize the role of financial assets in determining exchange rates. These models suggest that changes in a country's money supply can affect interest rates, investment flows, and ultimately the exchange rate through shifts in demand for domestic versus foreign assets.

Which of the Theories of Exchange Rate Determination States the Following